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Another rate hike to curb the highest inflation in three decades

The official cash rate is now 1.85 per cent after the Reserve Bank of Australia opted to raise interest rates a further 50 basis points at its monthly meeting today.

The increase marks the fourth consecutive month of interest rate hikes as the RBA seeks to moderate inflation that is now the highest it has been since the early 1990s.

The aim is to return inflation to a target rate of 2 to 3 per cent, but Reserve Bank Governor Dr Philip Lowe stated the path to achieving this “is a narrow one and clouded in uncertainty”.

“The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine and the Covid containment measures in China,” Dr Lowe said.

He explained inflation in Australia is the highest it has been since the early 1990s. 

“In headline terms, inflation was 6.1 per cent over the year to the June quarter; in underlying terms it was 4.9 per cent.

“Global factors explain much of the increase in inflation, but domestic factors are also playing a role. 

“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy. The floods this year are also affecting some prices.”

Dr Lowe said inflation was expected to peak later this year and then decline back towards the 2 to 3 per cent range. 

“The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, the stabilisation of commodity prices and the impact of rising interest rates. 

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to be around 7.75 per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.”

Dr Lowe noted the Australian economy was also expected to grow for the remainder of the year, with the pace of growth then slowing. 

“Employment is growing strongly, consumer spending has been resilient and an upswing in business investment is underway,” he said. 

“National income is also being boosted by a rise in the terms of trade, which are at a record high. 

“The Bank’s central forecast is for GDP growth of 3.25 per cent over 2022 and 1.75 per cent in each of the following two years.”

Dr Lowe also noted the labour market remained tighter than it had been for many years, with the unemployment rate declining to 3.5 per cent in June.

While unemployment is expected to further decrease in the months ahead, Dr Lowe predicted there would then be an increase as economic growth slowed. 

Meanwhile, Dr Lowe said a key source of uncertainty continued to be household spending. 

“Higher inflation and higher interest rates are putting pressure on household budgets,” he noted. 

“Consumer confidence has also fallen and housing prices are declining in some markets after the large increases in recent years. 

“Working in the other direction, people are finding jobs and obtaining more hours of work. 

“Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic. 

“The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”

As for further interest rate rises in the future, Dr Lowe said the Board expected to take additional steps in the process of normalising monetary conditions over the months ahead, “but it is not on a pre-set path”. 

“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. 

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Dr Lowe said.

Geoff Lucas – The Agency

The Agency Chief Executive Officer Geoff Lucas called for “cool heads” in light of today’s cash rate rise, and foreshadowed the possibility of a rate decrease in 2023.

He said now was the time to look beyond today’s headlines.

“The message is cool heads, look well beyond immediate headlines and make long-term decisions about long-term assets in a disciplined and considered manner,” Mr Lucas said.

“With buyer demand having dissipated – rarely in the past decade has there been a better environment for buyers to make decisions in this manner.”

Mr Lucas said analysis of the real estate market should move away from mainstream media “hype” and while rates may rise a little more, and prices will cool some more, the Reserve Bank of Australia’s “neutral setting” was likely approaching.

“They’ll (interest rates) go past this as inflation needs to be curbed and quickly,” he said.

“However the level and rate of increases may well be excessive and we’re likely to see rates reducing in 2023 after excessive use of the blunt monetary policy tool of interest rates snuffs out economic growth.”

Supporting his thinking that rates may fall in 2023, Mr Lucas said there were already signs in some countries that peak inflation may have been reached.

It’s also getting closer in some others.

“Whether it’s reducing prices of semi-conductors, shipping container costs, a fall in the 10-year government bond rate or the price of fuel at the Robertson servo, some prices are starting to reduce as signs of supply chain relief become evident,” Mr Lucas said.

“This inflation is predominantly supply (not demand) driven.

“Many on the east coast of Australia have seen a reduction of 40 cents per litre for fuel over the past month. 

“For inflation to continue printing at circa 6 per cent, prices that make up the inflation measure need to keep increasing. 

“As they actually decrease from all time highs, not only does it reduce the rate of inflation, a drop actually produces negative inflation into the calculation.”

Mr Lucas also pointed out that in Australia the inflation rate was published quarterly and while our most recent quarter was 1.8 per cent, which equated to an annual 6.1 per cent, it was below the previous quarter of 2.1 per cent. 

He said in the US, last week’s rate rise took the Federal Reserve to their ‘neutral setting’.

“The case is clearly for people to look through and past the immediate to what the future holds – and that’s rate decreases – as close as next calendar year,” Mr Lucas said.

Thomas McGlynn – Bresic Whitney

Bresic Whitney Chief Executive Officer Thomas McGlynn said while today’s cash rate rise wasn’t a surprise, it would impede the path to property ownership, especially for first home buyers and investors.

“While it’s not surprising given the economic measures put in place during the pandemic, the latest interest rate rise spells a particularly tough time for homeowners,” he said.

“Not only will it further impact the entry pathway for potential first home buyers, and the prospects for investors, but will contribute to the already complex and diverse factors exerting pressure on the wider Sydney property market.”

Mr McGlynn said it was clear the RBA had a direct figure in mind for the cash rate by the end of the year, things weren’t all negative.

“One positive is that it will help recalibrate and stabilise the industry sooner rather than later,” he said. 

“Other economic measures such as the NSW Government’s allowance for first home buyers to pay an annual property tax on homes up to $1.5 million instead of stamp duty, may help balance these ongoing pressures in the market and encourage stabilisation. 

“We look forward to this process taking place, and in the meantime, remain focused on helping vendors and buyers make informed real estate decisions.”

Nigel O’Neil – Barry Plant Group

Barry Plant Group Chief Executive Officer Nigel O’Neil said today’s cash rate increase was exactly what most people were expecting, and was likely to have little impact on the real estate market as a result.

However, he noted what had proved interesting was the situation in the United States, where interest rates were rising rapidly but the stock market was going up as well.

“It’s sort of like the normal rules attached to increasing interest rates aren’t applying, so people have already factored in these rises,” he said.

And Mr O’Neil noted a 0.5 per cent increase was designed to offer a careful balance.  

“If it was more than 50 points then it might have been a bit of a consumer confidence hit. If it was 25 points it might have caught consumers off guard.

“It’s still steady as she goes, there’s no surprises, the RBA is making up for lost ground, they’ve made mistakes and they’ve admitted them and now they’re playing catchup.”

However, Mr O’Neil did foreshadow that next year would prove interesting when the fixed rate home loans secured last year reverted to variable rates.

If people had strong equity in their home, he predicted they would be in a position to negotiate with the banks and secure a better deal.

“Those with heavy equity in their mortgages will be able to negotiate a little bit,” he said.

As for how many interest rate rises are to come, Mr O’Neil noted the RBA was seeking to create a delicate balance. 

“They’ll keep on increasing by half a per cent until there’s a bit of pressure on the economy around balancing the push towards a recession we had to have, versus a slight recession versus going too far.”

But he said the irony of the current situation was that in a normal economic landscape higher interest rates were designed to curb discretionary spending.

At the present however, most people’s expenditure is essential due to the fact the cost of petrol and everyday groceries are rising.

“I don’t know whether the RBA will see that their interest rate increases aren’t having the desired effect because there are factors outside that,” he said.

“At that point they may go ‘well do we want to go any further?’ For the Australian economy, they may slow it down.”

In terms of the property market, Mr O’Neil said it was important that vendors were properly educated about price expectations, and it would be interesting to see what happened in spring after the traditional winter slowdown.

Mathew Tiller – LJ Hooker

LJ Hooker Group Head of Research Mathew Tiller said the latest interest rate rise was unlikely to bring a rush of listings in Sydney and Melbourne, and could even result in fewer properties hitting the market in the popular spring selling season.

He said the RBA’s fourth consecutive cash rate hike was not unexpected, but the latest quarterly figures suggested inflation might be starting to slow.

While more stock will come to market, Mr Tiller said compared to previous spring selling season, he expected fewer listings.

“We are transitioning into a buyer’s market, which could mean people will be a little more reluctant to sell,” he said.

“Some vendors may think that there is more downside in terms of price reduction to come and will want to get ahead of the curve, but there won’t be a mass sell-off due to interest rates even with the current pressure on household budgets.”

Mr Tiller tipped the cash rate to reach 3 per cent during the RBA’s current cycle of increases, which is likely to continue into up until mid-next year.

Latest figures from CoreLogic show property price declines have continued in Sydney and Melbourne, while the Brisbane market has also dipped into negative territory. 

Perth, Adelaide and Darwin markets have continued to experience growth.

“Interest rates haven’t impacted the nation consistently, each market has its own micro-factors in play with different levels of stock and buyer demand, “ Mr Tiller said.

“We are seeing Sydney and Melbourne prices slow down more than other capital cities because they are the most unaffordable markets – higher prices mean higher mortgages and household debts which makes it more susceptible to changes in interest rates.

“If there are people who are forced to sell it won’t be because of interest rates alone but due to a combination of the overall costs of living putting too much pressure on household budgets.”

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said the widely expected 0.5 per cent lift in the cash rate was a further necessary move to return to a more ‘normal’ interest rate setting. 

“Prior to the pandemic, the Australian official cash rate had been sitting around or below 3 per cent for many years, and after the most significant turmoil in global markets in living memory,” Mr Cocks said.

“Most commentators are now predicting that official rates will peak at around 3 per cent – i.e. back to where the markets sat for almost a decade – and the sooner we get there, the better.”

Mr Cocks continued that while real estate buyers and sellers did not like change, they did respond well to certainty.

“It was only 18 months ago that the RBA was publicly stating that official interest rates would stay at 0.1 per cent until 2024 and with that apparent certainty, the real estate markets responded with strong transaction volumes and some of the most significant real estate price increases ever recorded in Australia,” he said.

“Our markets respond to certainty and retreat from change. By any measure, the cost of money that we have and are likely to see in the foreseeable future will be historically cheap, and when market sentiment absorbs the rebalancing we are now seeing, we’ll see activity in real estate markets return, which is why we need to get there as soon as possible.”

Mr Cocks noted Australia was well-positioned to deal with an increased interest rate environment. 

“Very low unemployment and rental vacancy rates, high levels of cash sitting in mortgage offset accounts thanks to enforced pandemic savings and significant equity held by the majority of borrowers all point to the markets being able to absorb the adjustments we are currently experiencing,” he reflected.

“The other big factor for real estate markets is that the supply side is not going to be able to deliver sufficient product to keep up with the increased demand. 

“Australian skilled migration levels are tipped to increase to 200,000 per year over the next few years. 

“That’s an increase of up to 50 per cent above pre-pandemic migration levels. 

“The preference or need to have a home office in a significant proportion of residences across the country has also removed a significant volume of bedrooms from the market. 

“The current cost escalations in the building industry and declines in many of the major residential markets are making it harder for new developments, particularly in the medium to high density sector, to stack up.

“While it’s clear that some necessary adjustments to real estate markets are well underway and there will be significant pain for some, all of the influences on our national real estate markets are pointing to very solid performance as soon as we see stability return to interest rates, which will hopefully be achieved this side of 2023.”

Eleanor Creagh – PropTrack 

PropTrack Senior Economist Eleanor Creagh noted today’s 50 basis point increase meant the cash rate had increased 175 basis points since May, making it the fastest rise since 1994.

“This was widely expected given the RBA has signalled a desire to, ‘get ahead of the curve’ and the board are committed to ‘doing what is necessary’ to overcome the challenge of high inflation,” she said.

“The economy has entered the tightening cycle with strong momentum and although consumer confidence has dropped, the labour market is tight, the unemployment rate is at a 48-year low, vacancies are at record highs and business conditions remain strong. 

“These conditions will allow the RBA to continue raising the target cash rate toward their estimates of the neutral rate, whilst monitoring the evolution of household spending as interest rates rise – a key source of uncertainty.”

And Ms Creagh said she expected the rate rises to continue as the board looked to stabilise inflation at the  2-3 per cent  target.

“How household spending holds up against a backdrop of higher inflation and falling house prices (the negative wealth effect), versus savings and wealth buffers, and hopefully stronger wages growth, will be crucial in determining the loss of conditions in the economy and how high and fast the cash rate rises. 

“This dynamic will also be a key source of uncertainty for the housing market and the pace and depth of price falls.”

Ms Creagh noted the successive interest rate rises had already moderated housing market conditions, buyer confidence had waned, auction volumes and clearance rates had fallen, as had sales volumes and prices.

“The PropTrack Home Price Index showed a national decline of 1.66 per cent in prices since March,” she said.

“As repayments become more expensive with rising interest rates, housing affordability will decline, pushing prices further down.”

Ms Creagh said the two major effects of increased interest rates would be on borrowing capabilities and the cost of servicing a mortgage.

“This will impact would-be borrowers and weigh on home prices,” she said.

“For sellers, it’s time to reset price expectations and be mindful that your property may take longer to sell with fewer competing bidders. 

“Demand from prospective buyers will continue to decline as uncertainties around future borrowing costs, the fast pace of rate rises and declining consumer sentiment weigh. 

“For those looking to get into the market, there will be less competition and a lot more choice that could create opportunities for some.” 

Graham Cooke – Finder

Finder Head of Consumer Research Graham Cooke said homeowners on a variable mortgage rate have been dealt another blow and could expect to pay thousands more per year in interest as a result of today’s rate rise.

He said the combined cash rate hikes will cost the average Aussie homeowner an additional $610 per month compared to what they were paying in April.

“Rising interest rates, soaring inflation, energy prices and the general cost of living are already squeezing household budgets,” Mr Cooke said.

“This latest hike could cost the average mortgage holder a whopping $7300 extra per year compared to what they were paying in April.

“With almost a quarter of Australian homeowners already struggling to pay their mortgage in July, this news will be especially painful.”

Cash rateAverage home loan rate*Average monthly repaymentAverage monthly increaseAverage annual repaymentAverage annual increase
April 20220.10%3.45%$2,727$32,728
July 20221.35%4.65%$3,151$424$37,816$5,088
August 2022(current rate as of 2 August)1.85%5.15%$3,337$610$40,045$7,317
2.50%(predicted peak)2.50%5.85%$3,605$878$43,266$10,538
Source: Finder, RBA. *Owner-occupier variable discounted rate. Repayments based on the average loan of $611,158 (ABS data analysed by Finder).

Almost one in five Australian mortgage holders (18 per cent) have refinanced their home loan in the past six months, according to a Finder survey of homeowners in July 2022.

The same proportion (18 per cent) say they plan to do so in the coming six months.

Mr Cooke said while most borrowers were facing higher rates, it didn’t mean they couldn’t find a better deal.

“Loyalty is invaluable when it comes to relationships, but it can really cost you when it comes to your home loan,” he said.

“If you haven’t checked the best offers on the market in the last year, odds are you could be paying too much.

“And if you are on a fixed loan, the variable rate you will land on is about to get a little uglier – be ready to pounce the moment you can switch.”

In this month’s Finder RBA Cash Rate Survey™, 27 experts and economists weighed in on future Reserve Bank of Australia cash rate moves and other issues relating to the state of the economy.

All panellists predicted a cash rate rise in August, with 88 per cent correctly predicting the increase of 50 basis points from 1.35 per cent to 1.85 per cent.

Household spending in May increased 7.9 per cent compared to 2021.

Despite this, 74 per cent of experts believe the recent cash rate hikes will be enough to rein in household spending and decrease inflation.

Laing+Simmons Chief Executive Officer Leanne Pilkington said the measures had already impacted sentiment.

“Rate hikes are dampening the property market, and it’s reasonable to believe increased mortgage repayments for a large number of Australians will affect spending over time, with a reduction in spending already being seen,” Ms Pilkington said.

Malcolm Wood of Ord Minnett noted, “Rate rises will absorb the elevated saving rate, reverse the wealth effect (lower home prices) and cap the amount of excess saving spent.”

The amount the average Australian has stashed in savings is creeping up, according to Finder’s Consumer Sentiment tracker.

In June and July, the average Aussie had $36,446 tucked away. That’s compared to $25,381 in January and February this year.

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.