Interest Rates, Inflation and the effects on the Economy & The Property Market
The RBA lifted the cash rate a further 25 basis points, to 3.35%, at their February board meeting. The cash rate has jumped 325 basis points since moving off record lows in May last year.
Today’s rise in the cash rate was broadly expected, but the trajectory of interest rates over the coming months remains highly uncertain and is tied to the outlook for inflation, which in itself is shrouded in uncertainty.
Headline inflation (1.9% Q4 / 7.8% annual) came in below the RBA’s forecast for the December quarter, but the more important core inflation reading (1.7% Q4 / 6.9% annual), based on the trimmed mean, was higher than forecast. However, core inflation was at least down slightly from the September quarter (1.9%).
Global inflationary pressures are easing, and domestically, a relatively weak December retail spending result could be the first clear sign that consumers are reigning in their spending. Additionally, the housing component of CPI, which has the largest weight of any sub-group, dropped sharply through the final quarter of 2022.
Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35%, through to another 75 basis points of hikes. However, a recent survey from Bloomberg puts the median forecast at 3.6%, implying one more hike of 25 basis points in the wings.
The latest rate hike takes recent borrowers outside of their serviceability assessments at the time of origination. Since October 2021, lenders have assessed new borrowers on their ability to service a mortgage under an interest rate scenario that is at least 300 basis points above their origination rate. The latest lift in the cash rate will push these recent borrowers beyond their serviceability tests.
For those with a home loan, the latest increase adds roughly $77 per month in repayments to a $500,000 variable rate owner-occupier mortgage and $116 per month to a $750,000 mortgage. Since the recent low point in April, on the same loan amounts, repayments have increased by approximately $821/month and $1,232/month respectively.
For the housing sector, higher interest rates represent a further downside risk to purchasing activity and values, although it’s reasonable to assume most Australians had already ‘priced in’ today’s rate hike.