Stay Vigilant: What You Need To Know About Today’s RBA Announcement
As expected, the Reserve Bank of Australia (RBA) has lifted the official cash rate for the third straight month to address the high inflation rate brought about by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity.
RBA governor Philip Lowe announced an increase of 50 basis points to 1.35% following the board’s July meeting on Tuesday afternoon. This is inline with most economists' revised expectations after the larger than expected 50 basis point in June.
The board noted that inflation in Australia is high, but not as high as it is in many other countries. Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.
Inflation is forecast to peak later this year and then decline back towards the 2–3% range next year. As global supply-side problems continue to ease and commodity prices stabilise, even at a high level, inflation is expected to moderate. Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services.
The RBA will publish a full set of updated forecasts next month following the release of the June quarter CPI.
Today's increase in interest rates by the Board marks three in a row increase since May 2010 and the first ever back-to-back 0.5% hike and a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
In the statement, RBA governor noted the Australian economy remains resilient and the labour market is tighter than it has been for some time. The unemployment rate was steady at 3.9% in May, the lowest rate in almost 50 years. Underemployment has also fallen significantly.
One source of ongoing uncertainty about the economic outlook is the behaviour of household spending. The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates. Housing prices have also declined in some markets over recent months after the large increases of recent years.
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)
Divided Opinions: What’s the outlook?
Less than a week before the RBA's July meeting, the Commonwealth Bank of Australia (CBA) increased its fixed mortgage rates by a large 1.4%. This followed moves by ANZ & Westpac to increase their rates by 0.9% earlier in June. NAB followed suit and increased the rate between 0..8% and 1%.
More hikes are expected over the coming months as Reserve Bank governor Philip Lowe predicted inflation would hit a 32-year high of 7%. Inflation is not expected to decline towards the central bank’s target of 2-3% until 2023.
Lowe said last week that the RBA would do “what’s necessary” to bring inflation down to the 2-3% target and that it’s “reasonable” to expect the policy rate will rise to 2.5%.
He flagged a lot more policy tightening ahead as rates were still "very low" and it was important that higher inflation did not feed into public expectations and wage claims. Yet, Reserve Bank of Australia (RBA) Governor Philip Lowe also played down the chance of rates being increased by a super-sized 75 basis points and took issue with market pricing of rates reaching as high as 4% by year-end.
The banks have differing opinions on how high the rates will go and when they will pause.
Goldman Sachs is more aggressive in forecasting the RBA will keep front-loading the hikes and raising the benchmark to 2.6% by the end of 2022 and the terminal rate at 3.1% while JP Morgan adjusted its cash rate forecasts and now expects a “terminal” rate of 2.35% by the second quarter of 2023.
Westpac is forecasting the RBA cash rate will reach 2.6% by the first quarter of 2023 while CBA is forecasting the official interest rate to be 2.10% by the end of the year.
For first-time buyers, rising interest rates come with both advantages and disadvantages. On one hand, lower house prices reduce the amount people need to save for a deposit. But on the other hand, rising interest rates mean people can borrow less and have higher mortgage repayments to make.
However, those planning to borrow a moderate amount from the bank compared to their income, might not see their budget shrink as much.
While property prices were tipped to drop in the next few years, the long-term trend was for property prices to continue growing.
Looking Forward: There is some GOOD News
The Commonwealth Bank of Australia (CBA) has predicted the Reserve Bank of Australia (RBA) will start slashing interest rates again, and it's sooner than expected.
CBA’s head of Australian economics Gareth Aird said the bank believes the RBA will start cutting rates mid-next year.
Aird said he expects a further 0.50% hike in July, followed by a 0.25% hike in August, September and November.
This would bring the official interest rate to 2.10% by the end of the year.
However, Aird said financial conditions would continue to tighten and lead the central bank to begin slashing rates once again.
“With the RBA now expected to take the cash rate to a contractionary setting, we have pencilled in rate cuts for the second half of 2023,” he said.
As the RBA is aggressively hiking rates and front-loading the rate hikes, there are fears that the economy will slow down toward next year as they overshoot the inflation target. This is similar to when the RBA was caught on the back foot as recently as early this year maintaining that the cash rate will remain at 0.1% until 2024 before making a complete turnaround on 3 May 2022 with a 25 basis point increase followed by 50 basis points in June.
To make matters worse for RBA decision-makers, they are relying on Consumer Price Index (CPI) numbers that are reported quarterly compared to monthly for all other major economies.
There are already indications that inflation has peaked or will be peaking soon as farm commodities took a tumble after a surge that pushed up prices in the first half of 2022. The Bloomberg Agriculture Spot Subindex is on track for its biggest monthly drop since 2011.
After Russia’s invasion of Ukraine wreaked trade flows and sent commodity futures soaring, fear of grain shortages is giving way to optimism that key producers will reap harvests large enough to cover the shortfall from Ukraine.
Supply may not be as impaired as earlier thought as other areas will compensate for any losses from Ukraine, and it is happening across the board.
Australia, as one of the biggest wheat exporters, is forecast to produce another huge crop this year, while Brazil’s biggest-growing area has so much corn it’s piling up outside bins. Nervousness in North America that spring weather woes would significantly cut grain and soybean acreage has abated.
RBA governor has said that he didn't see a recession occurring in Australia at this stage, partly because of the underlying strength in the labour market.
The latest Australian Bureau of Statistics data showed there were 480,100 job vacancies in May, up 13.8% since February. The level of job vacancies in May 2022 was 111.1% higher than in February 2020, prior to the start of the pandemic.
The next 12 months to 2 years will be tough for everyone as interest rates rise and most likely overshoot just as they did on the way down. This will affect growth severely and many businesses will be hurt. The key to getting through this is to minimise your pain, cut costs wherever possible and keep a cautious eye out for opportunities.
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.
Give Darren a call on 0452 339 778 or email him at [email protected] to discuss what options you have available.
