He’s only gone and done it again.
Not that it should be suggested the aggressive RBA rate hikes are all down to Governor Philip Lowe, but he’s the man at the end of the finger pointing of two million mortgage holders, however many of those have seen their variable rates skyrocket to an 11-year high.
The RBA’s 12th rate rise in 13 months takes the official cash rate to 4.1 per cent, the highest it’s been since April 2012.
While some recent data suggested the RBA might raise their rates, markets weren’t exactly expecting a rise. ANZ were the only one of the big four to forecast a rate rise this month, while Finder.com.au’s RBA Cash Rate Survey had just over 40 per cent of experts expecting a hold.
As we do every month, we’re going to look at what Governor Philip Lowe has said, and what experts and economists from around the country are saying about the outlook for interest rates in Australia.
What did Governor Philip Lowe say at the June meeting?
Lowe’s statement, which always accompanies an interest rate announcement, offered a few changes in narrative.
The biggest change in tune came from inflation.
“Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this,” Lowe said.
“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
There was also an acknowledgement that the growth in the economy had slowed.
“Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight,” Lowe said.
“The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated. Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.”
The conclusion of the statement was business as usual.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”
What did Governor Philip Lowe say at the May meeting?
The minutes of the May RBA meeting, which are always released two weeks after the rate announcement, also proffered some new insights to the current state of play.
The RBA said, when weighing up whether to hold the cash rate unchanged or increase by 25 basis points, the arguments were “finely balanced”, however they “judged it was appropriate to increase interest rates.”They said the information available over the prior month had confirmed that the labour market remained tight and that inflationary pressures were significant.
“That information also pointed to upside risks to the outlook for inflation,” the minutes read.
“If these risks materialised, they would further delay the return of inflation to target, with the prospect of a damaging shift in inflation expectations.
Lowe also cited the rental growth, which was pacing ahead of their main forecast.
“Rent inflation in the CPI continued to rise, with an influx of net overseas arrivals over preceding months adding pressure to rental markets that were already strained.
They suggested rent inflation was expected to continue to pick up over the coming year or so and add materially to inflation over the forecast period.
The RBA expects demand for new housing to pick up following a weak period, given the strong population growth forecasts over the coming years.
So why did the RBA hike interest rates?
Economic data released in the seven days leading up to the RBA rate announcement heightened the risk that Lowe may pull the trigger yet again.
The first was inflation, or CPI (Consumer Price Index). The CPI showed inflation remained stubborn at 6.8 per cent. While the RBA has acknowledged for the last few months that inflation has passed its peak, that number is still too high.
The RBA are targeting an inflation rate of between two and three per cent, a band in which they forecast it will get to by mid-2025.
Then there was the Fair Work Commission’s announcement that they would increase the award rates of pay by 5.75 per cent, which will put more money in people’s pockets. They also said minimum wages will rise by 8.6 per cent next financial year.
What have the interest rate rises done to mortgages?
Data from Finder.com.au found that Australian’s with the average loan size of $577,000 will now be spending over $15,000 more per year compared to what they were in April last year.
Hours after the RBA announced the hike, Westpac upped their variable rate to a new high 5.84 per cent for two years, while not disclosing whether they will be passing on the rate to their saving accounts.
What will the RBA announcement do to house prices?
There’s been a huge bounce back in home values across the country over the last few months, due to high demand for property stemming from the belief the RBA has finished its rate tightening (oops), paired with a critical lack of supply.
Property analytics firm CoreLogic’s Home Value Index saw values rise 1.2 per cent nationally last month, the strongest monthly growth since November 2021.
However CoreLogic’s Head of Research Eliza Owen says adding to uncertainty around interest rate decisions is the housing market dichotomy.
“In the short term, the June rate rise may take some steam out of the housing market.
“For the past two decades, there has been a strong negative correlation between movements in the RBA cash rate and the CoreLogic Home Value Index.
“However, like many economic trends since the pandemic, the housing market has defied expectations.
“With continued strong demand from a surge in overseas migration, a slow return to pre-pandemic household size in the capital cities, and persistently low levels of advertised supply, the June rate hike may only serve to take some steam out of the recovery trend in housing values, rather than reverse recent gains. “
What the experts are saying?
Before the June meeting, ANZ announced it was shifting its terminal cash rate view to 4.35 per cent from 4.1 per cent, essentially an extra rate hike at a future RBA meeting.
“We no longer see 4.1 per cent as sufficient to bring inflation back to the target in a reasonable period of time,” ANZ’s Executive Director & Head of Australian Economics Adam Boynton said.
Boynton said there would be a hike in June or July, most likely in June, as they said the RBA tends not to delay.
Westpac had expected a hold. Chief Economist Bill Evans said the board would seriously discuss a further rate hike, but it wouldn’t come in June.
AMP Capital’s Shane Oliver predicted a hold, thinking that the RBA had already done enough with a high risk of recession which would knock inflation a lot lower.
What’s next?
The March quarter national accounts were released June 7, the day after the RBA met. The accounts showed that the Australian economy is growing slower than was forecasted by experts. Gross domestic product (GDP) grew just 0.2 per cent in the March quarter. Most analysts had been expecting it to be 0.3 per cent.
“This is the sixth straight rise in quarterly GDP but the slowest growth since the COVID-19 Delta lockdowns in September quarter 2021," ABS head of national accounts Katherine Keenan said.
As for what’s next for the official cash rate, nearly two thirds of the experts and economists surveyed in Finder.com.au’s RBA Cash Rate Survey believe the cash rate will begin to decrease between November 2023 and April 2024.
Albeit these forecasts were before the RBA rose rates in June, but this is what the big four are thinking.
ANZ: ANZ believes the rate will peak by 4.35 per cent by August 2023, but they have a much longer outlook compared to the rest of the Big Four as to how long rates will stay high. They think rates won’t drop as sharply, forecasting rates to be at 4.1 per cent by November 2024.
NAB: NAB were expecting another rate hike, but had it pegged for July. They thought rates would hit 4.1 per cent in July, and then make their way down to 3.1 per cent by July 2024, which would be four cuts at 25 basis points.
Westpac: Westpac didn’t think there was going to be a hike, having forecasted the terminal cash rate (the highest the RBA will go) to reach 3.85 per cent by May 2023. They believe by May 2025 the cash rate will drop to 2.1 per cent.
CBA: CBA, the nation’s biggest lender of home loans, also thought the 3.85 per cent reached in May was as far as the RBA would go. Their long term forecasts suggest rates will drop to 2.6 per cent by August 2024.
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