One of the key questions for country is whether interest rates, which have been rock bottom for a couple of years are set to rise. The RBA was saying not until 2024 but have slowly been changing their tune, and the Fed lifted rates last week, and markets now think 50 basis points hikes are on the cards in the US.
The truth is markets are banking on significant rate rises over the next year or two. The ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve is at 2.675 per cent in August 2023, remembering the official cash rate is currently 0.1%. This would see mortgage rates up by as much as 3%, or close to 5%. That would be a horror for many borrowers.
But then again, we know already banks have been steadily lifting their fixed rate mortgages from ultra low 1.99 to closer to 3%, and the costs of funds as shown by Bond Yields is rising, making banks needing to hike rates to protect margins.
So the tussle between the markets and the bank are going to get interesting. And for the record, I am expecting some rate movements higher later in the year, but not as much as the markets are signalling. Nevertheless households were reminded by Phil Lowe recently they need to plan to hold buffers because rates may well rise, even if such rate hikes wont dampened inflation.
And by the way the third element in all this is employment and wages growth. If inflation continues to burn bright, unemployment may rise alongside, leading to the stagflation scenario. And that would be good for no-one.
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