Leading indicator predicts RBA rate hike run is over

Some potential relief for homeowners with the RBA rate tracker showing a 0 per cent expectation of an interest-rate increase to 3.85 per cent at the next RBA meeting.

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Relief is in sight for homeowners, with a leading market indicator predicting for the first time in a year that the Reserve Bank won’t touch interest rates next month, ending its 10-hike streak.

The RBA Rate Indicator – put out by ASX to track market expectation of a change in the official cash rate (OCR) set by the Reserve Bank – hit 100 per cent “no change” on March 14, just a week after the RBA put in a 0.25pp rise to 3.6 per cent.

“As at 14 March, the ASX 30 Day Interbank Cash Rate Futures April 2023 contract was trading at 96.440, indicating a 0 per cent expectation of an interest-rate increase to 3.85 per cent at the next RBA Board meeting,” an ASX statement said.

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The RBA rate tracker based on the ASX 30 Day Interbank Cash Rate Futures shows the market expects no change in the cash rate in April. Picture: NCA NewsWire/ Ben Symons.

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This as experts warned that 880,000 Aussie households were in the firing line this year as fixed rates expire, not all of whom were able to weather continuous hikes equally.

Moody’s Analytics economist Harry Murphy Cruise said since Australia’s tightening cycle began in May 2022, RBA has injected 350 basis points of cumulative interest rate hikes into the economy.

“Those higher rates have caught many off guard. Under a mandated 3 per cent serviceability test, households buying property at the start of the tightening cycle needed to show an ability to make repayments if the cash rate reached 3.1 per cent – an inconceivable level at the time”, but one which was hit on December 7, 2022.

Unlike the market indicators, Mr Cruise believes there could be one more hike left in RBA’s arsenal to tackle inflation.

“There’s more to come. We expect interest rates to peak at 3.85 per cent in April, lifting the average rate on new variable home loans to 6.5 per cent. It was just 2.5 per cent at the start of 2022.”

Consumer spending was flat in latest data according to NAB. Picture: NCA NewsWire / Brendan Read

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The latest NAB Monthly Data Insights out Wednesday found flat consumer spending and business credits in February, with falls across essential services, vehicles and fuel.

NAB chief economist Alan Oster said “consumption has held up but is unlikely to be able to sustain its strong recent growth rates”.

“While we expect inflation likely peaked in Q4, price rises are likely still contributing to nominal spending growth and, as such, the flat outcome for February implies a soft outcome for real consumption. However, these data remain subject to significant seasonal effects so it will take time to get a clear read of consumption trends.”

Mr Cruise said interest payments on mortgages last quarter were almost 5 per cent of disposable income, up from a low of 2.1 per cent in December 2021.

“Monetary policy is a blunt tool that hurts some households more than others”, especially given major disparity in savings levels between the highest earning households and the lowest.

“All in all, most Aussie homeowners are in a solid — albeit uncomfortable — position to keep pace with repayments as borrowing costs rise. But lower-income households have far less wriggle room; they couldn’t build a savings buffer as grand as that of high-income households, and inflation is disproportionately eating away at what savings they might have.”

“That’s what sits behind the expression that monetary policy is a blunt tool — it impacts all homeowners. However, the pain it inflicts lower-income households is much more acute.”

The RBA board’s next monetary policy meeting will be on Tuesday April 4.

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