• The Reserve Bank of Australia (RBA) has said it expects it won’t raise the official cash rate for at least three years.
• However, as home lending breaks records each and every month, and property prices surge, there are reasons why record low interest rates may not be sustainable for that long.
• While it’s unlikely the RBA would rush to raise rates, some economists and bond traders are expecting the central bank won’t wait until 2024 to do so.
• Visit Business Insider Australia’s homepage for more stories.

As Australia charts a bumpy recovery, the Reserve Bank of Australia (RBA) is in no position to be making guarantees.

However, in a bid to offset the enormous uncertainty produced by the pandemic, the central bank did just that, providing forward guidance on interest rates.

“Given the outlook, the Board is not expecting to increase the cash rate for at least three years,” RBA Governor Lowe said in November, as he slashed the official cash rate to a record low of 0.10%.

In meetings since, iterations of a similar line have been rolled out, in an effort to impart the confidence required to get Australians out spending their $200 billion in savings.

With the cash rate so low deposits certainly won’t be earning interest in the bank, and with mortgage repayments at all time lows, less is needed to keep a roof above your head.

However, from Canberra to Martin Place, Australians have also heard another phrase repeated over and over again.

It’s been articulated most consistently by Treasurer Josh Frydenberg, who has repeatedly acknowledged “forecasting is difficult at the best of times, let alone in the middle of a pandemic”.

What then will it take to make the RBA reconsider its three-year promise of record low interest rates?

Hot property and loose lending

The most obvious symptom of cheap money so far has been Australia’s resurgent property market. In February, prices jumped by their largest monthly margin in 17 years.

With mortgage rates at all time lows, it has been fuelled by record lending. ABS figures show more than $28 billion in new home loans were written in the month of January, or around 12% more than the previous record set in December.

As Australians chase rising property prices, they’ve become leveraged to the hilt in a battle to outbid each other on the limited number of homes actually on the market.

In cities like Sydney and Melbourne, where prices jumped more than 2% each in February, free-flowing credit is enabling Australians to borrow more in order to pay more. Unabated, the dynamic threatens to push prices higher until something gives. Currently, Westpac and the Commonwealth Bank are respectively forecasting two years of consecutive 10% and 8% growth.

While Lowe has eeiterated that the RBA’s remit doesn’t include monitoring house prices, it is very much concerned with debt. If lending figures continue to outdo each other month in, month out, the RBA will have no choice but to intervene.

Whether or not that involves tinkering with interest rates is entirely unknown. It could instead, as it has in previous years and as its New Zealand counterpart has done, move to tighten up lending standards to arrest the pace of the housing boom.

Still it’s unlikely the RBA would rush to intervention unless pushed, but unsustainable growth remains a major red flag.

Interest rates could rise as soon as next year

Certainly, the RBA isn’t typically known for its speed, preferring to wait to act. It’s entirely expected, for example, that it will keep interest rates on hold when its board convenes on Tuesday.

Longer term, some have begun speculating that the RBA won’t wait until 2024 or beyond to try to normalise interest rates again.

“The [bond] market has, seemingly, decided that the RBA will be raising rates in 2022,” CBA interest rate strategist Phillip Brown wrote.

This view is supported by some economists who think the 2024 timeline simply cannot hold.

However there are plenty of reasons to expect the economy won’t be anywhere near the shape needed for the RBA to begin winding back easy monetary policy, according to Brown.

“The [RBA] Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range. For this to occur, wages growth will have to be materially higher than it is currently,” he said.

“This will require significant gains in employment and a return to a tight labour market.”

Ultimately, there is plenty to discourage an interest rate hike coming before it is absolutely due. With the Australian economy unable to produce significant wage growth during normal times, it would appear improbable it would be able to do so before unemployment is slashed.

However, he RBA’s promise of no hike before 2024 remains an expectation – not a guarantee.

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