RBA mulled larger rate hike, more increases to come

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THE release of the Reserve Bank’s minutes suggest interest rates will continue to rise, with consumer confidence and affordability fading across the country after the RBA revealed it considered a 40 basis points increase.

After the minutes of the RBA’s board meeting saw the cash rate jump to 0.35%, the first hike in 12 years, after the bank pulled the rate down to record levels.

Back in November of 2020, the RBA put the cash rate down to a historic low of 0.1% to offset the economic downturn brought on by the first year of the pandemic and at one point believed the economy could hold at this rate until 2024.

Instead, inflation hit its highest rate since the introduction of the GST in July 2000, at 5.1%, with the RBA anticipating it will only continue to rise, hitting 6% before the end of 2022.

At the same time, wages remain stubbornly unmoving and affordability is rapidly falling out of reach for many Australians.

With home loan affordability worsening at an accelerating rate, with Australians needing to hand over 37% of their income to meet loan repayments and the surging cost of living leaving more people at risk of homelessness.

While the interest rate hike is already having the desired affect, with  many households putting off buying a home, which should see the fall in house prices accelerated. 

Additionally, the ANZ-Roy Morgan consumer confidence dropped 1.3% to 89.3% for a month of weekly declines now.

With the survey also showing more Australians to see themselves as worse off than better off compared to the year before, a consistent result since mid-January.

Those surveyed also saw fall in their confidence in paying off their home loan, dropping 0.6%, down 14.7% over the past three weeks

The minutes argue that the rise in inflation could predominantly attributed to current arguably temporary global conditions, rather than the initial cut to the rate or domestic economic conditions.

Though it was conceded that the “the flow of information on inflation and wages” more closely aligned with inflationary pressures from a limited available capacity in the domestic economy.

The minutes also revealed that the bank also considered a lower 0.15% rate rise, as well as a 0.4% rise before landing on 0.25 basis points.

“An argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates,” the minutes read.

The RBA stressed that if Australia were to adapt to an enduring inflation psychology, it would be far harder to bring inflation levels back down to the target.

“In making its decisions, the board agreed that it will continue to be guided by the evidence on both inflation and the labour market, while noting that significant uncertainties remain,” read the minutes.

Some economists are now anticipating that the RBA will introduce a further hike at its June meeting, with Tapas Strickland from National Australia Bank tipping that this would depend on wage growth figures meeting the forecasted 0.8% rise for the March quarter.

“A sharp upward surprise could see the RBA contemplate a larger hike,” said Strickland, who expects the RBA’s August meeting is the greater bet for a hike following the inflation results for the June quarter.

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