Today, the RBA announced that the cash rate will rise considerably, going up from 0.35% to 0.85% — its second hike in as many months.
Today’s news reaffirms the RBA’s shift in strategy in an effort to muzzle a worrying inflation rate.
And following today’s huge 0.5% increase, the RBA said the cash rate could rise again to help bring down inflation, which has blown out to 5.1%.
‘Inflation in Australia has increased significantly,’ said the RBA today.
‘While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation.’
The RBA also noted factors closer to home, including capacity constraints in some sectors, , the tight labour market, and recent flooding in NSW and Queensland all leading to price increases.
Unpacking this big increase, and it’s abundantly clear that rising rates are no surprise given how strongly the Australian economy has rebounded from the pandemic. Add to this unexpected events such as the war between Russia and Ukraine and the effect it has had on oil prices, plus the surge in power costs, and little wonder inflation has become a problem.
Rewind six months, though, and the RBA predicted that we may not see cash rate rises at all in 2022!
It demonstrates how quickly the economic and global landscape can change, requiring the RBA to be agile with monetary policy, as it outlined today.
‘Inflation is expected to increase further, but then decline back towards the two-three per cent range next year.
‘Today’s increase in interest rates will assist with the return of inflation to target over time,’ the RBA said.
To put today’s news into context, rates dipped to historic lows during 2020 and 2021 as a measure to help shield Australians from the economic downturn wrought by COVID-19.
Those were golden times for borrowers’ repayments with the cash rate hitting almost zero percent (0.1%).
The RBA last month upped the historically low rates for the first time in over 11 years in response to inflation concerns — and signalled more increases were imminent.
What’s more, with big banks and lenders largely all passing on last month’s rise, there’s no doubt that Australian households will again be impacted by today’s news — particularly as the cost of living still remains high.
As this country (and many others around the world) move into a higher interest rate cycle, expect a bumpy ride as inflation is tackled head on.
Peering into the cash-rate crystal ball, if we reach 1.75% cash rates, the repayments for an average variable borrower could be more than $440 extra per month. This is a key reason why the RBA have come out swinging today. Strategy-wise, they will be hoping inflation can be controlled swiftly in order to minimise the financial pain on Australians doing it tough.
So, why is the RBA even raising rates? It’s an often-asked question. To explain in simple terms, the RBA raises the cash rate so home loan rates go up.
Why? Because any increase in the cost of borrowing money dampens down spending across the economy.
By increasing the rate, people are less inclined to spend on other things, thereby reducing demand and pressure on prices, bringing them — and inflation — down.
That’s the theory, anyway.
In the short term, housing prices could be collateral damage. There is an expectation that house prices will fall as rates rise.
HSBC has revised down its 2023 Australian housing price estimates by 5-10%, while property analyst CoreLogic noted that last month it saw the first drop in monthly price growth rates for Sydney and Melbourne in almost two years.
So, as the housing market adjusts to this new cycle of higher interest rates, there’ll be winners and losers.
That said, with so much going on with housing and rates, Mortgage Broker Group is ideally placed as your trusted property market specialist.
We have the expertise to give credit assistance and, as you’d expect, we are an accredited member of the Mortgage and Finance Association of Australia (MFAA).
Contact our team and let Mortgage Broker Group do the hard work to help find a loan that really works for you.
BTW, we also can offer video conferencing, for your convenience.