RBA Governor shows true grit to raise rates by a further 0.25% to hit 4.35%

With the distraction of the general public, taking time out to watch the running of the 163rd Melbourne Cup the Reserve Bank of Australia Board (RBA) has taken a swipe at lingering inflation by raising the base cash rate by 0.25% to a 12-year high of 4.35%.

The biggest takeaway from the rate rise is that new Governor Michele Bullock could have easily avoided the rate rise and the undoubted backlash from struggling mortgage holders by laying off for another month, a sentiment expressed by several economists including KPMG’s Brendan Rynne who was vocal about this point.

But the new Governor has stamped her authority and shown she is all about business and possesses a far better understanding of what the economy requires at this time in history. See the reasoning in more detail in the statement below from the RBA, and the predicament that has caused this rate rise on this link.

And while the rate was expected by the majority of economists polled in the finder RBA cash rate survey where the panel was split 31 to 45, with 69% correctly predicted a rate rise of 25 basis points.

However, many panellists felt this rate rise could spiral many more borrowers into a panic attack that has seen a $600,000 housing mortgage rise in repayments by an extra $1500 a month since rates started increasing in May 2022.

And while buying a home is becoming increasingly difficult for average income earners, it isn’t the current round of interest rates to blame for these circumstances. The horse carrying the affordability silks for home ownership has long bolted with house prices booming to levels where even the sitting owners would not qualify to buy their own home at the bank.

Current figures indicate budding homeowners will need a minimum household income of $182,000pa before they should even consider buying. This obviously contradicts the chances of the many people with an average full-time salary of $96,000pa, according to ABS data.

The RBA is giving prospective homeowners a jolt to consider a change in their timing to buy when house prices drop, as they will at some stage, and also to consider the damage that unsustainable spending coupled with inflation could wrath upon anyone stretching themselves financially in order to purchase a property.

The Morrison government free-for-all gift giving that started the housing boom is money that many will never see again, with the latest RBA data showing offset accounts and redraw balances on mortgages have declined 78% from their peak in September 2021. Homeowners are struggling to collectively bank $3.4 billion each quarter at present, and that’s simply not enough to give everyone a buffer against eviction.

For any new homeowners, the best option could be to take a breather from the all-time highest house prices we have ever seen and, instead, come back to the market two years from now, when you could be pleasantly surprised.

Statement by Michele Bullock, Governor: Monetary Policy Decision

7 November 2023

At its meeting today, the Board decided to raise the cash rate target by 25 basis points to 4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.25 per cent.

Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.

The Board had held interest rates steady since June following an increase of 4 percentage points since May last year. It had judged that higher interest rates were working to establish a more sustainable balance between supply and demand in the economy. Furthermore, it had noted that the impact of the more recent rate rises would continue to flow through the economy. It had therefore decided that it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest rates so far. In particular, the Board had indicated that it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.

Since its August 2023 meeting, the Board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased. While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.

At the same time, high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. This is a more moderate increase than previously forecast. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.

Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

There are still significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. And globally, there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.

Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

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