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: RBA's Record Rate Rise And What It Means For You
This month, Michelle Bullock led her second meeting as Governor, highlighting the fact that there’s indeed a risk of sustained inflation and opting to move the cash rate up by 25 basis points, which has reached a 12-year high at 4.35%. This is the 13th rate rise since rates started rising in May of last year, and it signals a significant shift in the Australian monetary policy.
The reserve bank has had to push back its inflation target. They were hoping to have everything under control by August next year, but they’ve said they are probably not going to be back on target until the end of 2024. Despite lower economic growth early in the year, things have really picked up. The property markets picked up, migration has exceeded expectations with over 500,000 new entrants coming to Australia, and the cost of things has stayed up.
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.
Well, let’s have a look at what it means for the average borrower. Let’s say you have a $600,000 mortgage; this latest increase is going to take $100 out of your pocket in extra payments you need to cover per month. This means that since rates started to go up at the beginning of the rate hike cycle, borrowers are now paying roughly $1,400 more for the same mortgage.
Interestingly, if you’re looking to buy a new property, your borrowing capacity has been impacted. This latest rise has taken about 2 to 3% off your potential borrowing capacity. So, if you otherwise could have borrowed a million dollars, it’s 20 to $30,000 less.Â
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 has increased 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 interest rate hikes.
Although there was a bit of a dip in inflation rates recently, they’ve remained well above the reserve bank’s comfort zone and exceeded the target of 2 to 3% for almost 10 quarters now. So it’s really in an uncomfortable spot and it’s getting stickier. The RBA is worried that if they don’t nip things off at the moment, inflation is going to be here to stay and can cause bigger issues in the economy.
Current projections suggest that it could take another seven quarters—nearly 2 years— possibly even longer for inflation to reach the Reserve Bank’s target range, which is between 2 to 3%. They also need to consider lag periods between when the Reserve Bank makes its rate adjustments and when it starts to have an effect on the economy.Â
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: What the future holds
This move by The Reserve Bank has signalled that they are alert and conscious that there is a potential need for further interest rate Rises. As for the next month, many economists are split, saying they’re worried about the impact it will have on retail sales if they go too hard now—and because of the lag effect, they don’t want to go too hard.Â
The situation is evolving. The Reserve Bank is readily available, ready to make a move if they need to do it. But they are also teetering on the edge because they don’t want it to be a domino effect where they push too hard, and then, like that elastic band, it comes straight
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.
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