Are Interest Rates About To RISE?

Are Interest Rates About To RISE?

by Leigh Martinuzzi 

 

The RBA has made it clear that they have no plans to increase interest rates until inflation shows some signs of slowing down. For the year ending September 2021, inflation is at 3%. It is up to the RBA to maintain inflation and ideally keep it between 2 and 3%. If inflation is high, it means the costs of goods go up and the dollar weakens, which is not ideal for our economy. If inflation remains high for too long the RBA may increase the cash rate which is currently 0.10%. Is it likely they’ll raise the cash rate anytime soon?

 

Some people are now talking about a possible rate rise prior to the end of 2023. One article suggested a possible 1% rate rise in the coming year which could lead to a 15% to 25% market crash. However, being that banks loan based on a higher interest rate (5.5%) it is unlikely that 1% would cause too much mortgage stress for many homeowners. Anything above 2%, however, would more likely be felt.

 

For inflation to continue one would think wages would need to increase. If the cost of goods is up people need more money to afford them. Therefore, at some point inflation will reach a peak point in which people need to sacrifice their spending on certain goods to maintain a budget. This would obviously put downward pressure on inflation. Wage growth remains below 2% and forecasts by the RBA indicate it will improve towards 3% near the end of 2023. They also predict the unemployment rate will continue its downward trajectory and hit near 4% by the end of 2023. Therefore, it is at this time RBA believes it may need to increase interest rates. Unlikely to be sooner!

 

The uncertainty of the pandemic and what the future holds may disrupt the economic forecast moving ahead however on all accounts right now it is looking good. The pandemic has helped push inflation along but once things begin to open and get back to normal these will have less of an impact. Trade routes, shipping costs, and supply costs have increased during the pandemic putting upward pressure on many associated costs. Household savings have gone through the roof with many people not spending their money as they typically would and demand for durable goods has remained high. Once the borders open such demand will likely drop and fall below the averages. Instead of buying cars, we will all likely be spending our money traveling again.

 

The other thing to consider is that international migration will be opened to broader numbers. In recent years it sat around 200,000 additional migrants a year but the suggested forecast for the year ahead will be around 450,000. I am unclear how this would be beneficial for inflation, unemployment, or potential wage increases but I can’t imagine it would be. On all accounts, unless something unpredictable happens, we will likely see the cash-rate remain on hold for another year or two. And even if interest rates did increase, it’s not the wealthy that’s affected but the lower-income earners, who by the way are already being heavily impacted by rising property prices.

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