On the first Tuesday of every month the RBA board meets and decides what needs to happen to the cash rate. As has been widely predicted, when they met this last Tuesday (July) the decision was to raise the cash rate by another 50 basis points.
This matches the .5% rate rise last month, preceded by a .25% rise in May. We’re entering into a pattern of increases here, but it’s not unexpected and it’s not out of step with the global context. Let’s take a look at why the rate is going up.
Why is the Australian cash rate going up?
Inflation in Australia is the highest it been for a long time, with the figure of 5.1% recorded in the first three months of 2022 tipped to now be much higher than that. The disruption to supply lines and logistics caused by the pandemic have had a big part to play in this, as has the energy and food crisis triggered by Russia’s invasion of Ukraine.
The cash rate rises are a direct attempt to slow down household spending to try and slow down the rising inflation rate. Less money to spend in a household means less money is going to be spent. This means demand for goods and services goes down, which in turn means prices go down and inflation slows.
Another thing to remember is that the cash rate was at record lows because the RBA had dropped it to help shield Australia from the financial pressures of Covid. Rate rises from these historic lows weren’t just expected, they’re entirely necessary.
Will the cash rate continue to go up?
Yes, the cash rate and hence interest rates are likely to continue to go up. Inflation is not going to stabilise with this last rate rise, and is likely to reach 7% by the end of the year. In an interview with the ABC, RBA Governor Philip Lowe said “it was “reasonable” to think interest rates would reach about 2.5 per cent at some point”.
A takeaway from the interview is the RBA is committed to bringing inflation down to a healthy 2-3% in Australia. They’ll do what they need to do to achieve that, and that involves higher interest rates.
Who will rate rises affect the most?
With the big four banks already passing on the .5% rise to their customers in full, anyone with a mortgage in Australia is likely going to be affected by the rises. Even if you don’t have a mortgage but have a variable loan on a car or personal loan, that could also see an increase.
Anyone how took out a mortgage recently and has a larger loan amount to pay off is going to be affected more by these increases than people how have been paying off their loan for a number of years. This means first home owners could be affected quite heavily by these rate rises.
According to RateCity, “owner-occupiers with a $500,000 mortgage over 25 years could expect repayments to rise by $137 a month. Borrowers with a mortgage of $1 million will see an increase of $273 per month.”
The Australian economy is strong
Despite the recent rate rises and the effect they’re likely to have on household budgets, the Australian economy is in a strong position, particularly considering global events. The RBA believes we’re in a strong position to weather this storm, because:
“The unemployment rate was steady at 3.9 per cent in May, the lowest rate in almost 50 years. Underemployment has also fallen significantly. Job vacancies and job ads are both at very high levels and a further decline in unemployment and underemployment is expected over the months ahead.”
Ask us how the cash rate affects the real estate market
If you have any questions about the cash rate and how it affects real estate in Brisbane, please get in touch with The Henry Wong Team®. Henry would love to answer all your questions.