Interest Rates and the Reserve Bank: A Threefold Perspective

Published 10 August 2023

As we approach next Wednesday’s upcoming Reserve Bank’s official cash rate (OCR) review, all eyes will be looking to market experts and financial analysts who have been pondering the likely decisions and the impacts they may have on mortgage rates, inflation, and the housing market. Here’s a Threefold view of the scenario, blending our insights with prevailing opinions.

The Status Quo Maintained?

Most analysts are in agreement that the Reserve Bank will likely stick to their recent script, maintaining the official cash rate at 5.5%. They’re expected to emphasise that they don’t foresee the need for any further increase. This aligns with the prevalent view that there’s a balance in the inflation-related developments over the past few weeks.

What About Mortgage Rates?

Banks have recently increased fixed mortgage rates, potentially raising interest rates to a level that exceeds what the Reserve Bank deems necessary to bring inflation below 3%. Despite this, for the time being, the Reserve Bank may tolerate the economic weakness that these rate hikes imply. There are a couple of reasons for this acceptance:

  1. Housing Market Uptrend: Despite higher mortgage rates, the housing market shows signs of upward movement.
  2. Flexibility in Rate Cuts: The Reserve Bank has the option to cut interest rates earlier than late-2024 if they assess that the economic environment has tightened excessively this year.

A Glimpse into the Future

The general consensus among most experts is that the easing of monetary policy will likely come before mid-next year. This could lead to some cuts in fixed mortgage rates, possibly before this year ends but we think more likely to be early to mid 2024. These predictions align with the stability observed in the wholesale market rates, which have remained consistent over the past week.

Conclusion: A Balanced Approach

While there’s always a chance that markets may over-interpret the Reserve Bank’s analysis, the expectation is for a continuation of the current approach. With an eye on both short-term dynamics and long-term stability, the Reserve Bank’s actions will be closely watched by investors, homeowners, and financial institutions alike.

At Threefold, we’ll continue to monitor these developments and provide insights to help our clients navigate this ever-changing financial landscape. Stay tuned for more updates and analysis from our team of experts.

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The views in this article should not be considered as financial advice or endorsement of any financial product. Threefold shall not be responsible for any inaccuracies, omissions, or mistakes. The opinions are those of the author and may not represent the official stance of Threefold. We recommend seeking professional investment or financial guidance before taking any action.