Low interest rates have been around since the global financial crisis of 2008. When the pandemic hit, Governments pushed stimulus measures through the economy, and central banks reduced interest rates even further.
Coming out of COVID-19, the housing market demand was strong and prices boomed but at the same time, supply chains remained restricted and the problems were amplified by geo-political tensions increasing input costs. Supply could not keep up with demand to support recovery, pushing inflation higher than expected for a longer period of time.
To control inflation, central banks have responded by tightening monetary policy and lifting interest rates. But the good news is that inflation is likely to ease.
Interest rates are increasing slower than expected
Inflation in the US has started to decrease from a high of over 9% in June 2022 to 7.7% in October. This suggests that interest rates may not rise as high or as aggressively as expected in Australia.
The Reserve Bank of Australia (RBA) raised the cash rate by 0.25% to 2.60% at its October 2022 meeting, a lower increase than many expected. The lower than expected rise suggests that inflation pressures, particularly wages growth, will be more subdued in Australia than overseas. Comparatively, Australian households are more sensitive to interest rates with more than 60% of mortgages variable rate loans. This is unlike the US where most borrowers are on 30-year fixed loans.
The increase in interest rates is starting to take effect helping to restore price stability. However, in its statement, the RBA said that it will be a challenge to return inflation to 2-3% while at the same time “keeping the economy on an even keel”. It concluded the path to achieving this balance is “a narrow one and it is clouded in uncertainty”.
In housing, the correction in house prices deepened and broadened across Australia. Capital city prices are falling by 1.4% in September 2022, rounding out a 4.3% decline over the third quarter. Housing finance approvals also continued to mirror the broader correction to date, with further declines across investor and owner-occupier loans.
So, where does all of this leave us?
Inflation will stay higher for longer than originally anticipated. As a result, interest rates are expected to continue to increase, albeit at a slower rate.
Economists are predicting that the cash rate will increase to somewhere between 3.10% and 3.85% in the first half of 2023. They will then remain stable until early 2024 before RBA policy pivots and interest rates lower in early 2024. Canstar analysis suggests that a 3.85% cash rate translates to an average variable rate of 6.73%. The difference between a 5.73% variable rate mortgage and 6.73% is $650 per month on a $1 million, 30 year mortgage.
To find out how this will impact you, speak to your Aintree Group advisor today!