The Reserve Bank has decided to keep interest rates at the record low of 0.1 per cent but flagged the possibility of raising the cash rate earlier than expected.
The RBA has maintained throughout the year changes to the cash rate would not be made until at least 2024 however, experts believe changes to the cash rate could be made come 2023 when inflation is set to rise to 2.5 per cent.
According to the RBA, scrapping the yield target reflects improving economic conditions as well as a higher and earlier than expected inflation outcome – a reference to the 2.1% core inflation reading recorded over the year to September 2021. The RBA board has reiterated their stance that the cash rate won’t move higher until inflation is sustainably within their 2-3% target range, implying a requirement for tighter labour markets and a ‘material’ boost in wages growth before the inflation requirement is met.
Private sector economists are increasingly predicting the timing for a rate hike could be brought forward, potentially as early as the second half of next year, although the RBA has reiterated they will be ‘patient’ in their decision making around higher rates, noting the RBA now expects core inflation to reach the midpoint of their target range by the end of 2023. A further rise in core inflation could see the RBA adjusting their expectations for the inflation objective to be met even earlier.
An early lift in interest rates poses additional downside risk for housing values. We are already seeing the rate of house price appreciation ease due to affordability pressures, rising stock levels and, as of November 1st, tighter credit conditions. Once interest rates start to lift, there is a strong chance that housing prices will head in the opposite direction soon after.
Although a consideration of housing market conditions does not feature within the RBA’s mandate, housing trends do have a flow on impact to stability risks such as lending quality and household indebtedness. Arguably, the recent trends towards slower growth in housing values, and less housing credit growth, will help to lessen the risk of further macroprudential measures.