On 23 June 2021, when the current lockdown was at it’s beginning, Alex Evans of the Commonwealth Bank noted that the CBA Economists expected interest rates would “rise from November 2022, well ahead of the 2024 forecast of the Reserve bank of Australia”. They based this estimate on what they viewed to be:
1. strong Labor Market Conditions (i.e. lower unemployment); and
2. wages growth.
Updated Economic data and recent events
Since the CBA’s update in June, the delta outbreak and lockdown has progressed through Sydney and sporadically through regional NSW and other states.
Updated economic data has been released in the last few weeks confirming that wages growth was 0.4% for the June Quarter, lower than the expected 0.6% for what could be considered a quite ‘normal’ quarter (with the Sydney lockdown starting at the end of the quarter) and despite unemployment remaining low, including being at 4.6% in July 2021.
Likely impact on the coming year
All this would suggest that, in our view, the recovery suggested by the CBA would be delayed by at least two quarters given the Sydney Lockdown will persist through and impact the economic data in the September quarter and likely part of the December quarter.
We also note that given, as stated in the RBA Board Minutes in March 2021, “a materially lower unemployment rate would be needed to generate wages growth in excess of 3 per cent, which in turn would be required to ensure inflation was sustainably in the 2 to 3 per cent target range”; it can be fair to suggest that the CBA’s prediction of a late 2022 increase in interest rates may be delayed further and closer to the RBA timing of April 2024.
This is especially important to consider given the recovery and impact of vaccines is uncertain and the fact that the RBA would need to taper its quantitative easing over time before increasing rates.
Considerations for fixed and variable interest rates
All this may possibly point to a relatively consistent RBA interest rate in the coming two and a half years to April 2024. It would also lend some consideration to current 2-5 year fixed rates for those whom such an arrangement may be suitable given their circumstances against the above economic data.
We note that major banks such as the CBA, Bankwest and nab at the time of writing (subject to change) are still offering 2-year rates below 2%, and the 4-year rates in the low to mid 2% range.
Accordingly, if after reading the above you see value in reviewing your home loan and considering whether a fixed rate is appropriate for you, please contact Stephen, our accredited broker, at our office on (02) 9707 4470. We are available to assist you during the lockdown remotely.
Thank you for reading and taking the time to consider us.