What’s In Store for Interest Rates in 2022

Last week for the first time Reserve Bank of Australia governor Philip Lowe, admitted there is a possibility of a rate rise later this year, during his National Press Club address last Wednesday; acknowledging they will go up, but said he was unable to say ‘when’.

The likelihood of a rate rise this year has been predicted by the financial market and many leading economists, whilst the RBA adopt a wait and see approach, weighing up a number of factors, most importantly in relation to employment and inflation figures.

“If things go well and the economy performs strongly there are clearly scenarios where we would be increasing rates later this year if some of these uncertainties get resolved in the way that I hope they would. But time will tell,” he told the Press Club.

“There are a lot of uncertainties both on the supply side and the labour market dynamics, and because inflation is not that high at the moment, we can wait to see how those uncertainties resolve.”

Mr Lowe’s concession that a rate rise in late 2022 is a change from what the RBA’s forecasted last November, but its turnaround has been driven by the improvement in economic conditions over the past three months.

Some market commentators are touting it could be as early as August, whereas others are of the mindset that it will be no earlier than November. Financial markets have been pricing in a rate rise by mid-year while economists at the four major banks all predict the RBA will begin raising the cash rate later in 2022.

What could the implications of a rate rise mean for the housing market?

When the cash rate rises, housing values could experience some downwards pressure; however, it takes some time for movements in the cash rate to have their maximum effect on the property market.

It is reasonable to expect households would be more sensitive to the cost of debt when household debt levels are elevated – as they are currently. RBA data to September 2021 showed the ratio of housing debt to household income has reached a record high of 140.5%. With this in mind, households are likely to be more sensitive to movements in the cost of debt than they have been in the past.

However, it is not interest rates alone that determine the health of the property market, other factors come into play such as tightening/loosening of lending restrictions by financial institutions, population growth/decline, wage growth in ‘real’ terms, employment security, and consumer confidence.