A 25 basis point increase in the cash rate was announced by the Reserve Bank of Australia at its latest board meeting. It’s the sixth consecutive rate hike, bringing the cash rate to 2.6% – the highest since 2013.
At its October board meeting, the Reserve Bank of Australia took a step back from its shock and awe campaign of massive interest rate hikes.
Although retail sales are strong and the labour market is tight, Philip Lowe wants to wait and see how consumer spending, inflation and wages develop.
Since rates started rising earlier this year, the maximum amount prospective buyers can borrow has dropped by more than 20% since before rates went up, increasing borrowing costs and lowering maximum borrowing capacities.
As a result of this year’s fast pace of rate hikes, home prices have fallen nationwide and are now 3.4% lower than their March peak but still 30.7% above pre-pandemic levels.
Why has the RBA slowed?
As we enter a tightening cycle, the economy is maintaining solid momentum, the unemployment rate is at a 48-year low, spending is not expected to slow, and business conditions are stable.
Due to rising costs of living and low real wage growth, household budgets are under pressure.
Many mortgage holders are only now beginning to feel the effects of rate hikes due to the lagged effect of rate rises; a large proportion of variable rate borrowers are ahead on repayments and those on fixed terms that have yet to expire.
Once the rate hike lag passes, it remains unclear how households will react to the rate increases.
There will likely be a decrease in discretionary spending as households with mortgages begin to feel the impact of the rising cost of living and stagnant wage growth.
These effects will likely lead to a weakening of the previous strong momentum economy.
In light of this, the RBA slowed the pace of its cycle, giving them time to better assess the impact of what is a substantial tightening on the economy and household spending.
Compared to other countries, inflation expectations have risen moderately.
The board has been able to ease off the gas regarding their tightening cycle by combining wage pressures, which remain modest in Australia.
As a result of high inflation and sharply rising interest rates, global economic conditions have rapidly deteriorated.
In addition to the US, the Eurozone is frail, and the British economy is in a descending spiral. The world is already in a technical recession (two consecutive quarters of negative growth).
How does this affect the property market?
It is likely that homeowners will welcome the lower-than-expected rate increase, even though interest rates have risen substantially this year, and many homeowners will need to adjust their budgets to cope with the increased repayments.