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Ukraine war weighs on RBA’s rate deliberations

Reserve Bank governor Philip Lowe has called the Ukraine war a “major new source of uncertainty”, with a rate rise seeming unlikely for the near future.

The Reserve Bank of Australia (RBA) has decided to maintain the cash rate at its record low level of 0.1 per cent, in line with its previous expectations.

In his statement on the central bank’s monetary policy decision, RBA governor Philip Lowe nodded to the economic impacts of Russia’s invasion of Ukraine, with the board carefully watching how inflation moves as a result.

Prior to the announcement on Tuesday afternoon, market players had speculated the Ukraine crisis would impact the central bank’s decision-making.

“The global economy is continuing to recover from the pandemic. However, the war in Ukraine is a major new source of uncertainty,” Dr Lowe commented.


“Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand. The prices of many commodities have increased further due to the war in Ukraine.”

The RBA has aimed for annual inflation to be “sustainably” within the 2 to 3 per cent range, before it hikes up the cash rate.

For the central bank to be convinced that inflation is sustainably within the target range, annual wages growth will also need to rise above 3 per cent.

But annual underlying inflation has picked up more quickly than the RBA previously forecast, with its central scenario projecting a further rise in coming quarters to around 3.25 per cent, before declining to 2.75 per cent over 2023.

Supply-side problems are expected to resolve and consumption patterns are tipped to normalise next year.

Dr Lowe stated that while inflation has lifted, it is “too early to conclude it is sustainably within the target range”.

“There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems,” he said.  

“At the same time, wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target. The board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

Recent data from the Australian Bureau of Statistics (ABS) showed wages rose by 0.7 per cent in the three months to December, with an annual growth rate of 2.3 per cent.

Mortgage Choice national sales director David Zammit commented strong economic conditions have set the stage for a rate hike later in the year, but the latest wages data did not support a rise in March.

“The wage price index revealed a modest growth in wages in the December 2021 quarter, but not enough to prompt the Reserve Bank to bring forward a rate increase,” Mr Zammit said.

Meanwhile, Bluestone economist Andrew Wilson has expressed doubts about a 2022 rise taking place altogether, stating the subdued wages movements had “stymied recent widespread predictions of imminent RBA rate rises.”

“With real wages growth falling for the first time since 2014 and the clear prospect of further declines through higher inflation (exacerbated by current international geopolitical turmoil), the last thing the economy needs is higher interest rates - and the RBA knows it,” Dr Wilson said.

The RBA is also working to achieve its mandate of full employment. Unemployment is now around its lowest level since 2008, at 4.2 per cent.

The organisation’s central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to remain below 4 per cent in 2023.

Meanwhile, Finsure managing director John Kolenda believes the RBA will “cautiously deliberate any move” until there is further clarity around the Ukraine war.

“Putin’s actions have shocked the world and moved the goalposts for the RBA which had been navigating its way through the economic rollercoaster of the COVID-19 pandemic,” Mr Kolenda said.

“Money markets had been forecasting the RBA would be lifting the current cash rate of 0.1 per cent around the middle of the year due to inflationary pressures but now the situation in Ukraine has changed everybody’s plans while the flood disaster in south-east Queensland and northern NSW will also have an impact on the central bank’s deliberations.”

Similarly, Harley Dale, chief economist at CreditorWatch commented the RBA is unlikely to budge in the current environment.

“Damaging economic and humanitarian consequences have yet to play out and discussion of petrol prices here in Australia hitting two dollars a litre won’t be lost on consumers,” Mr Dale said.

“Consumer confidence has already been trending down for nearly 12 months and supply chain issues associated with the crisis is likely to lead to a higher demand in groceries, sparked interest rates and steeper mortgage repayments.”

Property market yet to slow down

Meanwhile, Eleanor Creagh, PropTrack senior economist noted that market data has shown house price growth is beginning to slow, with high prospective buyer demand expected to temper.

“While we are certainly getting closer to the housing price peak, it’s worth remembering that the RBA is explicitly waiting for a sustained pick up in wages growth before raising the cash rate, and that wage growth increase will help buffer the increase in mortgage rates,” Ms Creagh said.

“Also, by the time the RBA raises the cash rate, the economy will have strengthened.”

Similarly, Loan Market Group has reported strong levels of activity, with pre-approval volumes for the last three months lifting by 22 per cent compared to the same period a year ago.

Loan Market affiliate Ray White also reported 92.2 per cent active bidding on its auctions over the weekend, despite significant rain and flooding in Brisbane. Across the real estate group’s sales for the week, 77.9 per cent were owner-occupiers.

Loan Market managing director Andrea McNaughton commented: “Brokers should expect a heightened level of enquiry over coming months. Against all the noise that’s out there, it’s clear the market is placing its trust in brokers to better understand conditions and secure better outcomes.”

In anticipation of a cash rate rise, lenders have been raising their fixed rates, which Mr Zammit noted is “steering borrowers away from this type of home loan product”.

“Mortgage Choice monthly home loan approval data reveals demand for fixed rate mortgages dropped to its lowest level in five months in February, with only 26 per cent of borrowers opting to fix part of all of their mortgage compared to 43 per cent in September 2021, he said.

“Variable home loan rates are a much more attractive option for the time being.”

The last rate movement took place in November 2020, when the RBA slashed it from 0.25 per cent and began broad quantitative easing.

[Related: Federal government offers grants, as 'flooding disaster' escalates]

Ukraine war weighs on RBA’s rate deliberations

Sarah Simpkins

Sarah Simpkins is the news editor across Mortgage Business and The Adviser.

Previously, she reported on banking, financial services and wealth management for InvestorDaily and ifa.

You can contact her on This email address is being protected from spambots. You need JavaScript enabled to view it..

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