Refinance or Restructure Right Now: RBA Raises Interest Rates Again

RBA governor Philip Lowe announced an increase of another 50 basis points to 1.85% following the board’s August meeting inline with most economists' expectations.

The Reserve Bank of Australia (RBA) has now increased the official cash rate for the fourth straight month as the Board places a high priority on the return of inflation to the 2–3% range over time while keeping the economy on an even keel.

The board noted that inflation in Australia is the highest it has been since the early 1990s due to global and domestic factors. There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.  

Inflation is forecast to peak later this year and then decline back towards the 2–3% range next year as global supply-side problems ease and commodity prices stabilise in addition to 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.

Today's increase in interest rates by the Board marks four in a row increase totalling 1.75%. The last time there were four hikes in a single calendar year was in 2010, but the fourth hike then came in 6 months after the three in a row and, in total, only increased the cash rate by 1%. The last time the RBA hiked the cash rate this steep was back in 1994 when rates were increased by 2.75% in the space of just five months.

In the statement, the RBA governor noted the labour market is tighter than it has been for some time. The unemployment rate declined further in June to 3.5%, the lowest rate in almost 50 years. However, a key 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.

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.

Current Interest Rates (Big 4)

What’s the outlook?

Discretionary spending decreased across several sectors in June and is expected to contract further as monetary stimulus unwinds and interest rates rise. Economists expect several challenges to consumer discretionary spending over the coming months due to rising interest rates, the cost of living, and negative real wages growth. 

New data from the Australian Bureau of Statistics (ABS) showed that in June 2022, the unemployment rate fell by 0.40% as more people found themselves in work. Australia's unemployment rate has plunged to 3.5%, the lowest level on record in almost 50 years.

Following the tight labour market results as well as ongoing labour shortages, ANZ has revised its cash rate forecast, predicting there will be four more 0.50% hikes in the next four months, taking the cash rate to 3.35% by November 2022. This is the most aggressive forecast by the big four banks, as Commonwealth Bank, Westpac, and NAB have all predicted between 2.60% to 2.85% cash rate by November this year. 

Home borrowers have now copped 1.75% worth of rate increases since May – the steepest rise over four consecutive months since late 1994 and will have to prepare for more rate hikes if the predictions by the banks are accurate.

The minutes from the RBA's July meeting showed that the board believes the cash rate is still well below where it should be. The level of interest rates was still very low for an economy with a tight labour market and facing a period of higher inflation, according to July’s meeting minutes. Members agreed that further steps would need to be taken to normalise monetary conditions in Australia over the months ahead.

In the latest release by ABS, the June quarter inflation figures rose by 1.8%, bringing the 12 months to June 2022 quarter Consumer Price Index (CPI) to 6.1%. The figures indicate that consumer prices are rising faster than wages, and RBA is likely to continue the rate hikes towards normalisation or a neutral cash rate target of 2.5%.

The good news is the inflation rate came in lower than economists’ estimate of 6.3%, which led to the markets rolling back bets that a jumbo 0.75% hike may happen in August.

If you are currently on a variable rate or have a fixed rate loan expiring soon, now is the time to have your loan reviewed. 

Businesses that require equity or debt for growth will find that funding lines are getting more difficult to source. As such, it is important to refinance or restructure the facilities now to avoid cash flow strain on your budget. As rates continue to rise, it will get more difficult to refinance as the banks’ stress tests will have a higher threshold to be met. 

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