Are You Paying A ‘Loyalty Tax’ To Your Bank? Today's Interest Rate Update

The Reserve Bank has raised its overnight cash rate target by another 50 basis points to 2.35% at the board’s September meeting this afternoon as predicted by most economists in a Bloomberg survey, marking the fourth straight 50 basis point move by RBA. 

The Board remained steadfast in their commitment to return inflation to the 2–3% range over time while keeping the economy on an even keel. They noted the path to achieving this balance is a narrow one and clouded in uncertainty with the outlook for global economic growth having deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia's invasion of Ukraine, and the COVID containment measures and other policy challenges in China.

This move is necessary as inflation in Australia is at the highest level since the early 1990s and is expected to increase further. The RBA expects inflation to peak later this year and then decline back towards the 2–3% range following ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates. The Bank's central forecast is for CPI inflation to be around 7¾% over 2022, slightly above 4% over 2023 and around 3% over 2024.

RBA governor noted the Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade while the labour market is very tight  and many firms have difficulty hiring workers. Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. 

Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead. The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.

However, an important source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are starting to put pressure on household budgets as evidenced by the decline in consumer confidence and housing prices in some markets although the full effects of higher interest rates are yet to be felt in mortgage payments. 

The increase in interest rates over recent months is required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy. The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.

Current Interest Rates (Big 4)

What’s the outlook?

Australia’s labour market unexpectedly weakened in July with the economy shedding 40,900 roles from a month earlier, confounding expectations for a 25,000 gain and giving the Reserve Bank scope for a more flexible approach in its tightening cycle.

The RBA and many central banks worldwide arrived at the inflation-fighting party rather late, having spent the entire 2021 downplaying the impact with their transitory inflation narrative. Caught on the backfoot, RBA has embarked on an aggressive rate hike since May 2022 and risks going into 2023 facing a situation where house prices have fallen sharply, the economy is stalling, and inflation is declining.

With the chances of a recession looming and house prices declining, CBA expects to see the RBA backtrack and cut rates in the second half of 2023 in an attempt to have a soft landing.

ANZ has predicted that Australian house prices could plummet by 15% by the end of next year, with Sydney's housing market tipped to drop more than other capital cities and interest rates rising faster than expected.

With 57% of household wealth held in housing, it’s understandable that homeowners are affected by the prospect of house prices declining, however to put things into perspective, based on CoreLogic’s estimate, if there is a 10% drop in property prices, the national housing value will drop to levels seen in July 2021. A 15% decline will bring prices down to April 2021 levels while a 20% drop as estimated by some economists will bring prices down to January 2021, which is close to where national prices were in late 2017.

It’s important to take a long term view on property growth as those in the position to borrow and purchase a property now would find themselves having less competition while those sitting on the sidelines waiting for house prices to fall further next year, may realise it is already too late to buy by the time reports come out that prices have reached the bottom. 

Furthermore, the number of new house approvals in the twelve months ending July 2022 fell by 17.4%  while the number of units approved fell by 26% according to the Bureau of Statistics. This coupled with the Federal government’s proposed increase in migration intake to 195,000 people a year from its current rate of 160,000 may just lift demand for housing dramatically next year. 

It's worthwhile to see how significantly housing values have changed over time, specifically the past three decades from 1992 - 2022 based on Corelogic’s recent report below.

Source: Corelogic

Economists from the four largest banks are divided over the Reserve Bank’s likely interest rate trajectory and the Australian economy with Westpac and ANZ forecasting that the cash rate target will pass 3% before the end of this year and will peak at 3.35%, from the current 1.85% – a sentiment not shared by NAB and Commonwealth Bank.

On a more positive note, this interest rate hiking cycle may be short and sharp, with financial markets and some economic forecasters now factoring in interest rate cuts through the second half of next year with CBA predicting two rate cuts in the second half of 2023.

In a surprise move in early August, Macquarie Bank reduced their fixed rates by up to 0.76% p.a. which was quickly followed by the likes of Commonwealth Bank, Westpac, BOQ and Suncorp. Both CBA and Westpac slashed their four-year loans to 4.99 per cent with CBA slashing 1.6% off the previous rate. 

The huge cuts to fixed rates while increasing variable rates suggest the tide may be turning for fixed rates, which have been sharply rising since late last year. As the cost of fixed-rate funding starts to come back down, this gives us an indication of where variable rates may be headed next.

RateCity.com.au analysis showed that 23 lenders have reduced variable rates for new customers since the Reserve Bank began hiking interest rates in May, including CBA, Westpac, and ANZ. However, existing variable rate customers have seen their rates rise by 1.75 percentage points over the same period.

This is why everyone should have their loans reviewed to avoid paying “loyalty tax” to their bank. 

Give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.