After starting 2022 at just 0.1%, the official cash rate is now 2.6%. Since the RBA started Cash rate hike In May 2022, there were six interest rate increases this year, totaling 2.5%.
The increases came even though RBA Governor Dr Philip Lowe gave guidance during the Covid-19 pandemic that official interest rates were unlikely to rise until 2024.
Consequently, along with an extended period of record low interest rates, many Australians have borrowed heavily, and taken out large mortgages to counteract the surge. house prices. As a result, many may now begin to experiment Mortgage stress.
so what happened?
ForbesAdvisor asked three senior economists why prices started rising earlier than expected, whether they will continue to rise, what will stop the increases and when they might start to fall.
Why are interest rates rising?
Nikki Hetley, independent economist and economic advisor, Alexis Gray, chief economist for Asia Pacific at Vanguard, and Sarah Hunter, chief economist and partner at KPMG all agree that the RBA is raising interest rates to quell rising inflation.
As Ms. Gray explains, there are three main factors that contribute to high inflation:
- Suppressed demand as consumers spend what they saved during Covid-19.
- A change in spending habits with increased appetite for physical goods that suppliers struggle to meet.
- The Ukrainian-Russian conflict, which affected the production of many commodities as well as supply chains due to oil and gas supply restrictions.
Of these, Hunter says they are the first two that the RBA is particularly interested in. “Effectively, we have a mismatch between domestic demand and supply capacity and that generates inflationary pressures,” she says.
Gray says both headline and core inflation have already crossed 6%, well above the RBA’s 2% to 3% target range to keep supply and demand in balance.
The reason why raising interest rates is such an effective tool in lowering inflation is that it affects most Australians.
“Interest rates affect every loan across the economy, be it Mortgage or a business loans. “Higher rates make servicing your loan more expensive, and therefore lower costs in other areas,” Gray says. She adds that even for those without debt, higher interest rates send a signal to be more careful about spending money.
This year’s rate hikes felt like a shock because interest rates have been so low for so long. The last time the Reserve Bank of Australia raised interest rates was in 2010 and the last time interest rates rose so quickly in such a short period was in 1994.
“It’s important to remember that rates were at historic lows, and once the economy looked relatively strong after Covid-19, there was always a normalization of rates. The big question was how far and how they would go up, not whether rates would go up, Hotele says. .
Ms Hunter agrees: “This is not a cycle we are so used to these days, but if you look at the historical record, it is not uncommon.”
Will they keep going up?
The three economists agree that The hikes will continue. They expect the Reserve Bank of Australia to raise rates after its November 1 and December 6 board meetings.
Hunter expects two more increases of 25 basis points, which means the cash rate will end the year at 3.1%.
As for where to go from there, Gray says the liquidity ratio will eventually reach 3.5% to 4% over the next several months.
What needs to happen for interest rates to fall?
For interest rates to start falling, not only will inflation need to head towards 2% to 3%, but Ms. Hutley says unemployment has to rise and the economy is weakening.
With the expectation of the United States and Europe falling into Recession And slower growth in Australia’s main trading partner, China, the impact of global economic conditions will also play a role.
Whether or not the magnitude and pace of the recent interest rate hike combined with the global slowdown could push Australia into a technical recession, which is the equivalent of two consecutive quarters of negative growth. The subject of much discussion.
As Hunter explains, the RBA is “attempting to engineer a smooth landing, as a result of Goldilocks’ evasion”.
“Here we have some relatively useful fundamentals that mean that the result of slowing down and not going back seems achievable,” she adds.
Ms Gray is less optimistic, putting the probability of Australia avoiding a recession over the next two years at 45%, while Ms Hetley puts the risk that Australia will experience at least a quarter of negative growth in 2023 at “above 50%”. “If we end up in a recession, rates will drop more quickly,” she adds.
The big question is when?
Ms. Gray says conventional wisdom is that interest rate movements take about two years to travel through the economy, and Ms. Hottley says wage savings are not.
Significant increase across the economy, the Reserve Bank of Australia could begin discussing a rate cut in mid-2023.
But according to Ms Hunter, whether the first rate cut will come in late 2023 or the first half of 2024 will depend on whether there are any unexpected economic shocks on the horizon.
How low will prices go?
When interest rates start to fall, they are unlikely to fall to the lows Australians have been accustomed to in recent years.
Hotelly says the current 2.6% “may be close to neutral” while Hunter puts the neutral rate at 2.5% to 3% and Ms. Gray at around 3%.
“As a mortgage holder, I would like to get interest rates at 0%, but that means the economy is completely stagnant – we were only there when there was a big crisis, so we really hope we don’t go back there.” Gray says.