While not ideal for those trying to earn on cash, ultra-low interest rates have been a cornerstone reason to borrow. However, Australia and New Zealand Banking Group Ltd (ASX: ANZ) believes the Reserve Bank of Australia (RBA) might need to crash the party sooner than planned.
This month, the RBA maintained it wouldn’t be lifting interest rates from their historic 0.1% level until 2024 – at the earliest. But with economies bouncing back to pre-COVID levels, ANZ is sceptical.
Economic recovery prompts interest rate debate
In its latest research note, ANZ has upgraded its economic forecasts for Australia. According to its analysis, the country’s economic boom is shaping up to be even better than originally expected.
Based on ANZ’s estimates, the Australian economy is expected to grow by 5% this year and 3.5% next year. That level of growth would likely result in a reduction in unemployment, typically correlated with wage growth.
Consequently, ASX-listed ANZ expects the RBA will be forced to lift rates across two increments. Its forecast points to these increases occurring during the second half of 2023. However, the economist team added:
It is possible that the conditions for rate hikes arrive even earlier than the second half of 2023 if the recent trend of rapid improvement in the economy continues.
Risks of ultra-low interest rates
Low-interest rates are not a new phenomenon. Australia has had sub-5% rates since the global financial crisis. More recently, rates have sat at their historic low of 0.1% since November 2020.
However, there are risks that come along with prolonged low rates. While propping up the economy by providing cheap credit, they can also lead to devastation later. Cheap credit can increase risk taking and, with the housing market booming, a rate increase could topple the risk takers.
While an increase to 0.5% on paper looks innocent, it would be 5 times more than today’s rate.