Powered by MOMENTUM MEDIA
SUBSCRIBE TO OUR NEWSLETTER SIGN UP
Features/
Surprise RBA move on rates

Surprise RBA move on rates

Staff Reporter 3 minute read

The RBA has lifted the cash rate for the first time in 19 months. Should brokers be nervous?

On 6 October the Reserve Bank of Australia (RBA) lifted the official cash rate by 25 basis points to 3.25 per cent – surprising many observers who had not expected such action until at least November.analysis-1

The National Australia Bank (NAB) originally predicted two 25 basis point increases in February and March 2010, but revised this forecast in August to predict movement in November this year. NAB’s chief economist Alan Oster says the RBA’s move would not change NAB’s current forecast of a cash rate of 3.75 per cent by year end, but was unexpected.

“We had expected the RBA to start in November and move up 25 basis points in each of their next three meetings,” says Mr Oster. “While the RBA has started earlier than we expected we see nothing to change our expectation of a series of two additional rate rises in successive meetings.”

LJ Hooker Financial Services finance manager Tracie Palmer says she was shocked to see rates rise so soon and says another hike in the run up to Christmas would dampen consumer sentiment.

Advertisement
Advertisement

“Listening to some of the bank economists, I was expecting rates to hold till about February 2010 and I think they [the RBA] should have left them untouched until then,” she says.

“If rates go up again before Christmas it will curb spending over the festive period. People will be wary and spend less. They will save just in case their mortgage repayments go up substantially.”

The RBA’s move has also caught the mortgage broking industry unawares.

According to a recent Mortgage Business’ straw poll, 71.8 per cent of brokers did not expect the RBA to raise rates in October.

Of the 351 survey respondents only 25.4 per cent tipped the RBA to push up rates while 2.8 per cent were unsure.

But Ms Palmer says while the RBA’s move may cause some people to panic and tighten their purse strings, brokers should rest assured that it will not have a dramatic effect on their business.

“People will always need lending, no matter what the rate. However, some may become more cautious with how much they borrow and will take longer to make big purchase decisions,” she says.

RP Data’s director of property research Tim Lawless says while it makes sense for the RBA to raise rates from their historic lows, a balance needs to be struck.

“The economic conditions domestically and globally are still very fragile and any overly aggressive moves from a monetary policy perspective may frighten consumers,” he says.

But Mr Lawless says the overall effect on the housing market is not likely to be dramatic, with most property owners likely to have factored in a rate rise.

“The tightening of interest rates will affect demand in the first home buyer segment the most as this is by far the most price sensitive [sector] of the market,” says Mr Lawless.

“The number of new borrowers who have stretched themselves too thinly are not likely to represent a large proportion of the market due to the fact that banks have been exceptionally risk averse in their lending standards.”

Mr Lawless says although the market should be able to sustain successive rate rises, there would be a dampening of demand if mortgage rates again broke the 8 per cent mark.

In the boom period of 2001 to 2003, rates went as low as 6.05 per cent and were averaging 6.6 per cent. They rose to between 8 per cent and 8.55 per cent in 2007 as property values rose.

Surprise RBA move on rates
default
TheAdviser logo
default
FROM THE WEB
more from the adviser
Major bank to end introducer payments

A big four bank has committed to cease paying referral payments t...

Mortgage broker legal fund set to be established

Brokers are being asked to submit expressions of interest in whet...

AFS licences revoked after firms failed to join AFCA

The corporate regulator has cancelled the financial services lice...