In the world of finance, change is constant. Hints from financial institutions about further interest rate increases paint an interesting picture for prospective home buyers. The projected cash rate of 4.85% by September 2023 indicates a continued upward trend.
This change could affect the whole Australian economy and your personal finances. In this blog post, we’ll explain what this change means and how you can handle it.
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Watch Now: RATE HOLD: Lifeline or Mirage for Homeowners?
The Reserve Bank has decided to hold the official cash rate this month, which is the second consecutive month in a row that they’ve held the cash rate steady at 4. 1%. This may not actually ease any pressure for homeowners who are already struggling from the previous 12 increases we’ve seen.
Since May of last year, the cash rate has increased by 4%, and the Reserve Bank has aimed at creating a sustainable balance between supply and demand in the economy. However, current data points towards an easing in inflation and slower demand for growth, suggesting that the 4.1% cash rate we currently have at the moment might be the peak of the cycle.
Despite this trend, there are still some potential challenges for the Reserve Bank, especially concerning the services side of inflation. To ensure inflation returns to its target level by mid-2024, the Reserve Bank will likely take one additional rate hike as an insurance measure to ensure inflation gets back down to target levels. Philip Lowe has warned that further rate increases may be necessary depending on incoming data and their assessment of risk.
However, The RBA is also aiming to maintain the pre-pandemic labour market gains, therefore increasing the probability that the current cash rate of 4. 1% might be the peak.
NAB believes the peak cash rate will hit 4. 35% later in the year. The timing of the rate hike depends on data, and NAB believes that November is when the Reserve Bank will have its last rate hike, and there is an expectation that the cash rate will be cut by August of 2024, which will gradually see the cash rate reduced to 3% by early 2025.
What does this mean if you have a mortgage or are looking to get into the market?
Based on NAB’s forecast, we might be very close to rates peaking. Based on historical figures, when rates peak, they’re likely to stay in a peak state from anywhere from 4 to 16 months, the median being 10 months.
That means once rates peak, they stay there for a while, but after 10 months, we could start to see rates coming back down.
This month’s rate pause might be unlikely to give any calm to mortgage-stressed homebuyers, and potential increased listings could also reduce property prices for more homeowners if they’re forced to sell due to economic strain. Property listings might rise faster than demand, potentially pushing prices lower.
A& P’s Chief Economist, Shane Oliver, said a rate pause won’t attract more homebuyers. This is due to their borrowing powers being reduced with the 4% rate increases over the last 12 months, meaning that their borrowing ability is 29% lower than before rates started to hike.
The Reserve Bank and the Impact of an Interest Rate Hike
The RBA is Australia’s central bank. Its role is to keep the currency stable, help people find jobs, and improve economic welfare. One way it does this is by setting the “cash rate”. This rate is the interest rate at which banks borrow money from the RBA.
A higher cash rate affects a lot. It influences the cost of loans, savings account returns, and the strength of the Australian dollar. Now, the RBA might increase the cash rate by 0.25%. This decision is due to ongoing inflation, which has been rising recently.
What's Driving the Inflation Increase
Why has inflation been rising? One reason is fuel prices, which have gone up since an excise cut six months ago. Other costs, such as rent and travel, also remain high. These factors are contributing to overall inflation.
Inflation is also rising because of broader economic shifts. Global supply chain issues due to COVID-19 have increased the costs of goods. Some sectors also have labour shortages, which have pushed up wages. These factors are making the RBA consider an interest rate hike.
The Rate Hike's Impact on Borrowers and Homeowners
The Housing Affordability Crisis
This increase comes at a time when housing affordability is a major issue. Home prices and rental rates have been skyrocketing. This has put stress on first-time homebuyers and low-income earners. A potential interest rate hike could make this issue worse.
The Wage Increase – Good or Bad?
The minimum wage has recently gone up – the biggest increase in decades. This has sparked speculation that the RBA will raise the cash rate. Higher wages can boost spending and stimulate the economy. But they can also fuel inflation if businesses raise prices to cover increased labour costs.
The Fair Work Commission has been strategic with their pay rise decisions to avoid exacerbating high inflation expectations. As they navigate this delicate balance, their decisions are a crucial factor for those interested in the Australian financial landscape.
Addressing the Australian Housing Crisis: Controversy Surrounding the RBA's Suggestions
Australia continues to struggle with a housing crisis. The head of the RBA, Philip Lowe, has suggested that Australians should consider staying with their parents or getting a flatmate to deal with rising rental rates.
Lowe's Suggestion and the Response
Lowe’s statement has sparked controversy. Critics argue that Lowe doesn’t understand the issues facing Australians struggling with housing affordability.
Conclusion: Navigating the Current Australian Financial Landscape
The Australian financial landscape is a complex tapestry, interweaving the anticipated interest rate hike, persistent inflation, the minimum wage increase, and the ongoing housing crisis. As we steer through these turbulent waters, staying informed and ready to adapt is more important than ever.