Risk of earlier RBA rate hike after cash splash

The Government’s $96 billion stimulus program outlined in last night’s Federal Budget could raise the risk of an earlier interest rate hike, economists have forecasted.

George Tharenou, chief economist at global investment bank UBS, forecast that a greater-than-expected budget position could force the RBA’s hand in lifting interest rates from their current historic low of 0.1 per cent.

The central bank has repeatedly said it was targeting interest rates to remain where they are for a further three years, pending upward pressure on wages and inflation.

“We still expect the RBA to hold the cash rate until end-22, but we now see the risk of an earlier rate hike than the RBA’s forward guidance of 2024,” Mr Tharenou wrote in a research note.

The economist also noted the economic impact of closed international borders.

“The budget assumes a further delay to re-opening of the international border until mid-2022,” writes Mr Tharenou.

“But despite this, there’s a virtuous cycle of rounds of much larger than expected fiscal stimulus, resulting in the economy and labour market booming, underpinning a materially better than expected budget ‘starting point’, then allowing for even more fiscal stimulus.

Any rise in interest rates could pose considerable risk to new buyers who have taken on large mortgages in the wake of the COVID-19 pandemic.

Peter White AM, managing director of the Finance Brokers Association of Australia (FBAA), said home ownership initiatives such as allowing single parents to purchase with just a two per cent deposit could increase risk.

“One note of caution, however. In extremely low interest rate environments that create soaring house prices, government incentives to enter the housing market with very little deposit mean that some people could end up with a negative equity position when interest rates rise again and property prices fall or correct,” Mr White said.

“Therefore the FBAA still encourages people to save as much deposit as possible as this will leave borrowers in a far better position in the long term.

“However overall, our advice is to never leave it too long to enter the property market as prices will always keep rising in the long term.”