A couple of weeks ago the Bank of Canada became the first central bank to explicitly pull back from signalling that they intend keeping interest rates low through to 2024. They said that they anticipate conditions will be right for moving rates away from record low levels in the second half of 2022.
No other central bank has yet been this explicit and just this week the Reserve Bank of Australia repeated that it intends keeping its official cash rate at 0.1% through into 2024. Our central bank has never actually placed a timeline on its low interest rate policy, instead making any rate change conditional on the achievement of its key targets.
Those targets are inflation near 2% and “supporting maximum sustainable employment”. Inflation is currently just 1.5% and although there are many price rises moving their way through the economy – notably in the construction sector – the Reserve Bank is unlikely soon to be thinking that inflation risks warrant signalling a rate rise anytime soon.
But what about employment?
In that regard their position is going to soon start to become difficult to sustain. We learnt this week that employment rose by a stronger than expected 0.5% in the March quarter and sat 8,000 or 0.3% higher than the level immediately ahead of the nationwide lockdown last year.
All the jobs lost in the tourism, hospitality, and retailing sectors have been more than replaced by jobs in other sectors. In fact, were staff available it is likely that jobs growth would have been even stronger recently – though the unemployment rate might still be about where it is.
Unemployment peaked at 5.2% in the September quarter last year, fell to 4.9% in the December quarter, and now sits at 4.7%. This is far, far lower than anyone was forecasting a year ago and lower also than the Reserve Bank’s prediction for a rate above 5% through to the end of 2022.
Is the Reserve Bank likely to react by signalling rate rises lie ahead?
No. At this stage there is no evidence that firmish jobs growth is leading to a higher pace of increase in wages and that is what the Reserve Bank is likely to want to see before it notes the approach of full employment and expresses concern about the eventual impact on consumer price inflation.
The upshot of all this is that borrowers can probably still look forward to low floating mortgage rates and a low one-year fixed rate through into late-2022. But well before then fixed lending rates will rise and some already have. Some banks have raised their five-year rate above 2.99% for instance. But short-term rates remain at the low levels in place following last year’s easing of monetary policy.
There are nonetheless signs from my monthly survey of mortgage advisors that borrowers are starting to exercise some caution. In the most recent survey, a gross 39% of advisors said that their clients largely prefer the one-year rate. That is down from 49% one month earlier, 73% two months ago, and 89% back in January.
Only 6% say that the borrowers are opting for my favourite of five years, but that is understandable for two reasons. First, the jump from below 2.3% to 2.99% is a bit much for many borrowers. Second, there is a rate reset risk attached to when the five-year rate matures.
Therefore, for most borrowers the optimal thing may be a spread of fixed terms to at least allow time for adjustments to be made should interest rates unexpectedly rise strongly over the next few years.
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