Pulling in the Reins - Rate Hikes Still Expected For Some Time

After four straight 50 basis point hikes, the Reserve Bank gave borrowers a breather by slowing their sixth hike to 25 basis points to the surprise of economists and bringing the overnight cash rate to 2.60% in line with their September meeting minutes.

As the cash rate has increased substantially in a short period of time, the Board decided to increase the cash rate by 25 basis points this month while it assesses the outlook for inflation and economic growth in Australia. 

The Board reaffirmed its commitment to returning inflation to the 2–3% range over time as inflation in Australia is still too high due to global factors plus strong domestic demand and  further increase in inflation is expected over the coming months. RBA’s forecast is for CPI inflation to be around 7¾% over 2022, a little above 4% over 2023 and around 3% over 2024.

The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring workers. The unemployment rate in August was 3.5%, around the lowest rate in almost 50 years while job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. Beyond that, some increase in the unemployment rate is expected as economic growth slows.

Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher. 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.

Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining after the earlier large increases. 

The Board will closely monitor the global economy, household spending and wage and price-setting behaviour before deciding the size and timing of future interest rate increases. 

The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

Current Interest Rates (Big 4)

What’s the outlook?

The Reserve Bank of Australia (RBA) has now hiked interest rates six times in as many months, with average households now paying up to $800 a month more on their home loan repayments based on the national average home loan size of $600,000. 

The rapid hikes have put unprecedented pressure on Aussie households, especially those who hadn’t experienced a rate hike in the past 11 years.

Most homeowners have only felt the effect of the third or fourth rate rate as banks are required to provide 30 days notice prior to increasing the monthly repayments. With long lead times in this current cycle, there is a risk that the impact of consumer spending decline and unemployment may go unnoticed and that the RBA will overshoot with unnecessary rate increases, just as they missed the uptick in inflation.

RBA’s moves had already started putting pressure on new home lending, which had dropped 8.5% in July, the second-fastest drop in the past two decades. Fewer Aussies looking to purchase a home led to declining property prices. PropTrack senior economist predicted that home prices were expected to continue falling throughout spring as higher interest rates weighed on buyers with many on the sidelines.

However, despite the recent falls, prices were still significantly above their pre-pandemic levels. Regional areas remain up almost 50% since March 2020 and capital city prices are up 26% over the same time period according to PropTrack. Although regional areas have recorded their largest quarterly price falls in a decade, the biggest price falls are still in Sydney and Melbourne. Sydney home prices are now sitting below their August 2021 level.

According to Corelogic, when interest rates start to level out, the current housing downturn is likely to follow suit and if interest rates start to trend lower in late 2023 or in 2024, this could be the catalyst for a return to growth.

CoreLogic August data shows the national home value index fell 1.6% from July to August, the biggest monthly decline since 1983, and a further decline of 1.4% from August to September. It marked the fifth consecutive monthly fall. After rising 25.5% over the recent growth cycle, housing values across the combined capitals index are now -5.5% below the recent peak, or in dollar terms, down approximately -$46,100.

The Reserve Bank governor has confirmed that interest rates will keep rising as the board continues its attempt to tame inflation and that the board is considering hiking rates by 0.25% or 0.5% at the October meeting.

CBA is expecting a peak rate of 2.85% by November 2022 with NAB predicting 3.1% while ANZ and Westpac expect RBA to be more aggressive with their peak predictions at 3.35% by December 2022 and February 2023 respectively. CBA is also expecting two 0.25% cuts in late 2023 while the other three banks expect rate cuts only in 2024.

If your fixed rates are expiring soon, give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.