As of the June quarter, Australia’s Consumer Price Index (CPI) is sitting at 6.1% – an increase of approx. 2.3% since June 2021, resulting in Australians paying more money for almost everything ranging from food through to fuel.
Transport costs alone increased 13.1% as the price of fuel rose to record levels for the fourth quarter in a row, with further impacts derived from the Ukraine War. New houses also rose 9% from the year prior.
To combat rising costs, the Reserve Bank of Australia (RBA) introduced back-to-back interest rate increases of 50bps since May, leaving many homeowners and investors wondering just how high interest rates will go?
According to WestPac and ANZ, the cash rate target is forecasted to surpass three per cent before the end of 2022 – almost double the current rate of 2.35% (September 2022) in the next four months.
Chief Economist of Westpac Bill Evans takes the position that if the RBA is intentional about bringing down inflation swiftly, they will need to increase interest rates more aggressively – even if it comes at the expense of slower economic growth. By increasing cash rates at smaller increments, he believes inflation will not reach the top of its 2-3 percent range until the end of 2024.
Contrastingly, the Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) don’t foresee the cash rate rising above three percent in the near future as too many rate rises will likely take the economy backwards.
CBA’s Head of Australian Economics Gareth Aird recently told RN Breakfast that he is not of the belief this will happen, because once they get the cash rate to around their estimate of neutral (approx. 2.5%), they will likely want to pause and analyse the economy’s response.
While it’s still possible that they may take the cash rate to higher levels, they may back pedal in this scenario as we have a highly indebted household sector and rate rises of that extent will put too many households under stress, resulting in reduced consumer spending and widespread economic consequences.
In recent months, the Reserve Bank has stated that things are not following a “predetermined course”. This will make interest rate rises less predictable and more dependent on “incoming data and the board’s assessment of inflation and the labour market” RBA governor Philip Lowe said.
What Do The Leading Economists Have To Say?
In Economist Gareth Aird’s opinion, the RBA will soon stop raising rates if the economic data can support it. According to Aird, we will see a slowdown in the economy in the near future due to how “quickly they are taking up cash right now.”
The views of Mr Aird are largely based on in-house economic data from CBA’s millions of customers, who bank with the institution. There are likely to be a lot of households that are going to feel the effects of the rate hikes immediately. As a result, they will have to adjust their spending habits.
In addition, AMP’s Chief Economist Shane Oliver believes the cash rate won’t need to rise much further for inflation to be tamed. Australia appears to be trailing the US by about six months in terms of core inflation, indicating a peak later this year here as well.
While it’s crucial to prepare for the worst case scenario, particularly when it comes to property investment, it is also important to note that changing interest rates are a normal part of the property cycle. Given we enjoyed historic low interest rates for a number of years, driving enormous capital growth, the property market must undergo what we call a ‘correction’ period to stabilise its growth. However, despite the natural ebbs and flows, the general trajectory of property over ever changing interest rates, recessions and GFCs has always gone up, meaning that property still reigns king over any other asset class.
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