Are we nearing the peak of inflation? Here's today's RBA Announcement

At its meeting today, the Reserve Bank delivered another 25 basis point rate hike, bringing the cash rate to a 10-year high of 3.10%.

Inflation in Australia is too high, at 6.9% over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.

RBA expects a further increase in inflation over the months ahead, with inflation forecasted to peak at around 8% over the year to December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand. RBA’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3% over 2024.

The board noted that the Australian economy is continuing to grow solidly. Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The Bank’s central forecast is for growth of around 1.5% in 2023 and 2024.

The labour market remains very tight, with the unemployment rate declining to 3.4% in October, the lowest rate since 1974. Employment growth has also slowed as spare capacity in the labour market is absorbed. 

The Reserve Bank noted there has been a substantial cumulative increase in interest rates since May, but is of the view this is necessary to ensure that the current period of high inflation is only temporary. RBA’s priority is to re-establish low inflation and return inflation to the 2–3% range over time.

The Reserve Bank recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain. 

The RBA Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.

The Reserve Bank expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. 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?

Inflation eased slightly last month, according to new monthly Australian Bureau of Statistics (ABS) figures, however, both businesses and economists say it may not have peaked just yet.

The monthly consumer price index (CPI) rose 6.9% over the year to October, down a little from the 7.3% headline inflation rate recorded in September.

There is good reason to believe inflation in Australia is near a peak for this cycle, according to Reserve Bank of Australia (RBA) Deputy Governor Michele Bullock, pointing to a loosening in global supply chains and lower oil prices but warned there is still plenty of risks to the upside including energy prices, rents and geopolitics.

In spite of that, she reiterated that further increases in interest rates would be needed to ensure inflation receded from 32-year peaks around 8.0%, with the size and timing of future increases, dependent on the data the RBA receives. She was hopeful that higher borrowing costs and a slowing world economy would eventually do the trick.

Australian house prices are expected to rise in 2023 if the Reserve Bank pauses rate rises and inflation drops, according to a new report from property analysis firm SQM Research. 

SQM Research's Housing Boom and Bust Report for 2023 forecasts capital city house prices will rise between 3% and 7%. The report's "base case" forecast hinges on the RBA not hiking the cash rate above 4%, inflation dropping to 5%, and unemployment staying below 5%.

In this scenario, house prices rise by between 5% on average, including rises of between 9% and 13% in Perth, 8% and 12% in Sydney, 3% to 7% in Brisbane and 2% to 6% in Melbourne.

And if the rates start to go down, Australia’s property market could be 9% higher than they are right now. On the flip side, properties could decline in value by as much as 6%in a worst-case scenario where interest rates continue to rise and inflation keeps going up.

The annual inflation is 7.3% and is set to hit 8% by the end of the year, while unemployment is at 3.4%. 

The RBA is widely tipped to pause the rate rise cycle by mid-2023 and leave the cash rate unchanged for the rest of the year.

Despite all the doom and gloom news, long term investors can take comfort that property prices have always been in the uptrend. Australian house prices have doubled over the last two decades, while rental prices have grown at half that rate, according to a new report from the Real Estate Institute of Australia.

REIA’s latest Real Estate Market Facts report found that the weighted average median house price for the capital cities rose 103.8% to $1,011,208 between 2002 and 2022.

If you would like to review your home loan options, give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.