All the economists were unanimous in expecting the Reserve Bank to leave the Official Cash Rate unchanged this time round and they didn’t disappoint. The OCR was held at 5.50% for the fourth time.
When will we finally see some interest rate relief?
Background to the current environment:
This time three years ago we’d just come out of lock-down for the first time and red flags were beginning to emerge.
Not medicinal red flags, financial ones.
Here’s what happened…
When the pandemic first reared its invisible head in early 2020, governments started pumping rivers of stimuli into their economies and put every safety net in place, rendering it almost impossible for employers and employees to lose their shirts.
Consequently, while consumers worked from home, some were hoarding piles of cash with little opportunity to spend.
By late 2020, the bond market (the best forecaster of interest rates) started heading north suggesting inflation was about to scream and rates would go up much sooner than 2024 which the Reserve Bank had indicated.
Incredibly, despite all the warnings, central banks around the world remained adamant rates wouldn’t go up until 2024.
And now, three years later, some within the commentariat are suggesting rates should start coming down because inflation has peaked.
It’s as if rates should be cut as a reward for lower inflation.
But will it happen? And if so when?
Firstly, I’m not convinced inflation is under control yet, especially with the recent spate of wage increases we have seen.
Secondly, even if inflation was under control, I still wouldn’t expect rates to come down by any great shakes anytime within the next 12 months.
If rates go too high, and unemployment starts to rise, then rates will have to be cut to stimulate the economy to create more jobs.
Put simply, you hike rates to fix inflation and you cut rates to fix employment. Currently we don’t have high unemployment.
Our typical recommendation at the moment is to stick to the 12-18 month rate terms, rather than be drawn into the banks sub 7% 2-5 year rates; as we are at the peak of the cycle we just aren’t ready to come down the other side yet.
Of course everyone’s circumstances are different so seek professional advice before locking any rates in.