How high will interest rates go?
Better Loan Solutions in Mornington Peninsula • Learning Centre • Insights
Better Loan Solutions in Mornington Peninsula • Learning Centre • Insights
Low interest rates have been a mainstay 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, housing market demand was strong
and prices boomed but at the same time, supply chains remained restricted and the problems amplified by geo-political tensions increasing
input costs.
Supply could not keep up with demand to support the recovery, pushing inflation higher and broader 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.
Inflation in the US has started to decrease from a high of over 9% in June 2022 to 7.7% in October, suggesting that interest rates may not rise as high and as aggressively as expected.
Similarly in Australia, the Reserve Bank of Australia (RBA) Board 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, with capital city prices 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, with the RBA resetting their view along the journey. Economists are predicting that the cash rate will increase
to somewhere between 3.10% and 3.85% in the first half of 2023 and 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.
LIVE EVENT
3rd May 2024
Welcome to Mornington Peninsula's original pop-up pre-loved market with a difference. Fashion For A Cause is a not-for-profit
fundraiser event. Grab a fashion bargain or unique piece, wine with friends, bid on silent auction items, all to raise funds for Clothes
4U.Inc. All proceeds from the event including stall sales, ticket sales and clothing purchases on the night will be
double-dollar-matched and donated to Clothes 4U Inc.
A new issues paper from Treasury’s Competition Review questions whether non-competes and other restraints are limiting job opportunities and movement.