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Interest Rates and Inflation

Australians should expect interest rates to hike again after releasing “disappointing” inflation data.

Economists are tipping another interest rate hike after “disappointing” data released this week revealed inflation had climbed back to a 30-year high.

Background – interest rates and inflation

The Reserve Bank of Australia is expected to raise the cash rate by 25 basis points from its current 3.10 per cent when its board meets for the first time since December on 7 February.

The central bank’s decision will be guided by data published by the Australian Bureau of Statistics on Wednesday, showing the monthly consumer price index rose 7.3 per cent in the year to November 2022.


The monthly CPI jumped from the 6.9 per cent recorded in October to return to the level recorded in September.

The renewed strength in the CPI comes despite the RBA having rapidly lifted the cash rate since May last year from a historic low of 0.10 per cent to curb consumer spending and put downward pressure on inflation.

Betashares Capital chief economist David Bassanese said the central bank would treat this week’s inflation data as “disappointing”.

“Inflation is still uncomfortably high even if it’s coming off its peak,” he said.

Mr Bassanese said floods pushing food prices, a strong housing market, and high energy costs were some drivers of the latest inflation spike.

Mr Bassanese expects the Reserve Bank to announce a .25 per cent increase to the cash rate — which guides interest rates set by lenders — after its meeting next month.

“If they pause rates now, it’s going to be very hard for them to start raising rates again without risking destabilising sentiment,” he said.

Canstar Blue finance expert Steve Mickenbecker is also predicting a 25 basis point hike in February, saying the RBA “has got to be disappointed” with the latest monthly CPI figure.

Mr Mickenbecker expects the central bank to raise the cash rate by another .25 per cent in March before taking a breather.

“Let’s say we end up with a cash rate of 3.5 per cent after the first two weeks in March, and that’s then virtually a year for interest rates to have slowed things up,” he said.

He said the “blunt instrument” of interest rate increases only directly impacted mortgage holders in the short term, with more time needed before its effects are felt across the broader economy.

“At some point, it starts to filter through businesses investing less and employing fewer staff,” he said.

“It will start affecting demand and supply in the economy.”

Treasury expects inflation to peak at 8 per cent in December.

The ABS will release the quarterly CPI data for the December quarter on 25 January, less than a fortnight before the RBA board meets again.

The CPI measures the average change in the price of a basket of goods over a certain period and is used as an official marker of domestic inflation.

Property prices

There’s no longer a monthly Reserve Bank of Australia meeting that doesn’t stress the dire need to curtail inflation through higher interest rates.

There is no shortage of real estate professionals or stressed mortgagees responding that enough is enough and the rates rises have taken effect and must stop.

But regardless of the pain homeowners feel trying to meet mortgage repayments, recent buyers staring into the abyss of negative equity, or property prices falling at the fastest pace in memory, any hope that rate rises might abate soon appears slim.

Cruelly for those struggling with the cost of living demands and covering their essentials, Michelle Marquardt, ABS Head of Prices Statistics, said housing was the main contributor to the annual increase in inflation.

“High labour and material costs contributed to the annual rise in new dwelling prices (+17.9 per cent) although, the rate of price growth for new dwellings has eased compared to the 20.4 per cent annual rise seen in October,” she said.

The most significant contributors to the annual rise in November were housing (+9.6 per cent), food and non-alcoholic beverages (+9.4 per cent), transport (+9.0 per cent), furniture, household equipment and services (+8.4 per cent) and recreation and culture (+5.8 per cent).

Whichever way it is broken down, RBA Governor Philip Lowe, if he remains as true to his word as he has throughout the current cycle of rate hikes, will have little choice but to hit borrowers yet again.

High inflation

“The main driver of high inflation continues to be housing, and while construction cost increases are starting to slow, high advertised rents are now beginning to hit sitting rents.

“Also, food costs are rising due to flooding and fuel cost increases continue to be a problem.”

Predicting rates will plateau mid-year, Ms Conisbee added that while interest rate rises have impacted job vacancies and building approvals, “we are still spending up big.”

“Black Friday sales drove retail sales to record highs in November. However, this event pulled forward sales that would have otherwise been made in December.

“For now, any mortgage or rental stress that people may be feeling is yet to flow through to spending on goods and services, a situation that is likely to change this year.”

Eleanor Creagh, Senior Economist at PropTrack, said buyers would retain the upper hand in the property market in 2023 as interest rate pressure continued to weigh on property values nationally.

“With market conditions cooling and more choice, buyers are regaining the upper hand in negotiations, properties are staying on the market for longer, with buyers having less pressure to move so quickly,” she said.

“The significant reduction in borrowing capacities implies further price falls.

“It will take time for higher interest rates to affect prices fully, so they are likely to continue to fall as interest rates continue to rise.”

But the downward pressure from rate rises would be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, more substantial wage growth and housing supply pressures over the long run.

The case for a rates pause

Acknowledging inflation had risen, Hayden Groves, the Real Estate Institute of Australia (REIA) President, said it was still time to rein in the interest rate hikes.

“While the latest inflation figure is up, it is the same as the figure for the September quarter and is below the Budget forecast of 7.75 per cent and the RBA’s forecast of 8.0 per cent, pointing to a slowing down in the rate of increase.

“Whilst new dwelling prices rose 17.9 per cent in the year to November, the rate of price growth eased in November compared to the 20.4 per cent annual rise in October.

“Rent prices increased further this month from an annual increase of 3.5 per cent in October to 3.6 per cent in November, reflecting the tight market and low vacancy rates.

“With the RBA Minutes of its December 2022 meeting showing that the Board expected a sustained decline in inflation in 2023 and the current CPI suggesting that the CPI has peaked, it is time for the RBA to ease up on its interest rate hikes at its first meeting in 2023 in February,” Mr Groves said.

“At that time, it will have the December quarter figures for the CPI.”

Interest rates are hitting first-home buyers.

The impact of the first seven Reserve Bank cash rate rises has stalled the property market with subdued new borrowing while refinancing activity soared in November.

The value of new housing lending fell for the 10th consecutive month, down by 3.7 per cent in November. Lending to owner-occupiers fell in November by 3.8 per cent, while lending to investors dropped by 3.6 per cent.

Rising interest rates and higher loan repayments have diminished borrowing power since April, making it harder for first-home buyers to get a foot in the door.

Analysis by Canstar shows borrowing power has fallen by almost one quarter (24 per cent) since April.

A solo purchaser with an average income of $92,030 has reduced their borrowing power by $135,000 since April. A couple with a dual income of $184,060 has reduced their borrowing power by $312,000 over the last ten months.

Rising interest rates and higher loan repayments have severely impacted all borrowers. With Canstar’s analysis shows borrowers faced a 38 per cent increase in home loan repayments from May to November, adding more than $800 to repayments on a $500,000 loan over 30 years or more than $1,600 on a $1 million loan. 

Australian borrowers will be eagerly, or tentatively, awaiting the outcome of the subsequent RBA interest rates announcement on 7 February.

The content of this article is intended to provide a general guide to the subject matter. You should seek specialist advice about your specific circumstances.

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Interest Rates and Inflation