RBA mulls one more rate rise as borrowers tap into savings
The Central Bank might impose its last increase in the interest rates on the economy on Tuesday, leading to a prolonged period of stability in monetary policies. This is due to indications that the substantial savings accrued by Australians during the pandemic are being depleted as a result of inflation and the burden of hefty mortgage payments.
As recent data indicated an increase in property prices in Sydney and Melbourne in the previous month, the RBA committee confronts a challenging choice with Philip Lowe, the current governor, on whether to raise the official cash rate by an additional quarter percentage point, reaching a new peak of 4.35 per cent, the highest in 11 years.
The financial institution has boosted the interest rate in 12 out of its last 14 gatherings, and experts have mixed opinions on what it will do next. However, the chances of another increase according to the financial markets are less than 10%.
According to various markets and economists at prominent private banks such as Commonwealth and Westpac, it is widely believed that the Reserve Bank of Australia (RBA) will put an end to its policy of raising interest rates after Tuesday. Instead, it is anticipated that the RBA will opt for rate reductions in the latter half of 2024.
According to Jo Masters, the chief economist at Barrenjoey, determining the interest rates becomes a challenging task for the Reserve Bank when they are at the conclusion of a cycle where they are either increasing or decreasing the monetary policy.
"If the interest rates stand at 1 percent and inflation is at 8 percent, making the decision to increase rates becomes quite straightforward," she remarked.
The Reserve Bank committee is confronted with a difficult choice on Tuesday regarding whether to impose another increase in interest rates on the economy or maintain the current level.
"However, we have reached a stage where it becomes a delicate decision for the bank to determine."
According to Masters, there is a belief that the bank will increase interest rates again. He stated that although inflation has slightly decreased to 6 percent between June of the previous year, it may be challenging to bring it down adequately within the RBA's desired range of 2 to 3 percent.
She mentioned that the Reserve Bank of Australia had to carefully consider the trade-off between the potential consequences of insufficient efforts to regulate inflation and the flexibility needed to change course in case the economy faced difficulties.
"It boils down to the option with the fewest regrets at this juncture. While there is a possibility of excessively strict measures, if the bank determines in the coming February or around that time that interest rates are too elevated, it can subsequently reduce them," she expressed.
According to the chief economist at Barrenjoey, Jo Masters, she predicts that the Reserve Bank of Australia will increase interest rates once more before keeping them stable.
As previously mentioned, reducing interest rates can yield a rapid and substantial effect.
The monthly payments for an average mortgage of $600,000 have increased by over $1350 since May of last year. Additionally, it is predicted that around 800,000 individuals with fixed-rate loans, which were obtained during a time when interest rates were extremely low, will switch to significantly more costly loans by 2023.
Even with increased interest rates, property prices are recovering, partly because there is a shortage of available houses.
According to the latest data from CoreLogic, the value of houses in the entire country increased by 0.7% in July. This marks the fifth month in a row with an upward trend. Since February, there has been a total increase of 4.1% in home values, following a previous decline of 9.1% from their peak in April 2022.
In July, the value of houses in Sydney rose by 1 percent, bringing the total increase over the past three months to 5.1 percent. However, despite this improvement, house values are still 2.4 percent lower compared to the same time last year.
In Melbourne, prices went up by 0.3 percent in the previous month, showing a 1.8 percent improvement over the last quarter. However, when comparing to the previous year, Melbourne's housing market has experienced a significant decrease of 5 percent in property values.
According to Tim Lawless, the research director at CoreLogic, the pace of growth in property values has decelerated in the last couple of months, primarily due to a surge in the number of properties being listed for sale.
He mentioned that some individuals may be aiming to enter the prime period of spring shopping, yet he warned that there could be others who are selling due to financial constraints.
"He mentioned another potential scenario where we may be witnessing the initial indications of deliberate selling as the swift series of interest rate increases begin to impact individuals' financial situations."
Additional proof of the strain on families was unveiled in the latest monthly figures from the Australian Prudential Regulation Authority, indicating the initial decrease in household funds stored in banks since May of this year.
In June, there was a slight decrease of 0.6% in the overall amount of money deposited in the country's banks, which accounts for nearly $8 billion.
The central bank has previously mentioned the significant rise in savings among households during the pandemic. Within the top four major banks, the amount of savings has surged from $715 billion before the COVID outbreak to a whopping $1 trillion.
New information provided by the RBA indicated that private sector credit experienced a growth rate of merely 0.2% in June, which was significantly below initial expectations. While housing credit for owner-occupiers experienced a marginal increase of 0.4%, credit for investor housing saw a decrease of 0.1%. This decline is notable as it marks the first decrease since June 2020, when the property market was impacted by pandemic-related restrictions.
According to the chief economist at CreditorWatch, Anneke Thompson, it is highly probable that the Reserve Bank of Australia (RBA) will maintain the current interest rates, as there is increasing proof indicating a reduction in economic growth.
"We are making progress in tackling inflation, as evidenced by the positive quarterly inflation and monthly retail trade data, although the unemployment rate is not yet at the desired level by the RBA," she stated.
Although the rate of inflation for services continues to rise, the primary factors driving it - such as rents, insurance, and utilities - do not exhibit any sensitivity to increases in the cash rate. Therefore, it is improbable that the RBA will be persuaded to raise the rate further by the ongoing inflation observed in these particular sectors.
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