The Reserve Bank of Australia lifted the country’s official interest rates in February, with the 25-basis-point rise taking it to 3.35% – its highest level since September 2012.
In the statement accompanying the decision, RBA governor Philip Lowe reiterated that the central bank’s priority is to return annual inflation to its target range of between 2-3% (it’s currently 7.8%).
“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” he said.
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”
What’s the cash rate got to do with inflation?
You might be wondering how a higher cash rate will dampen inflation and why interest rates play such a crucial role in this process.
Well, higher interest rates make the cost of borrowing money more expensive, which directly impacts consumer behavior. In theory, this will encourage Australians to spend less and save more, putting downward pressure on prices and helping to control inflation. By increasing interest rates, the Reserve Bank of Australia aims to slow down excessive spending and stabilize the economy.
You can see this dynamic playing out clearly in the current property market, with higher home loan interest rates reducing both buyer demand and borrowing capacity. As a result, property prices have started to fall in many markets (though not all), showing how interest rates directly affect major sectors of the economy.
The connection between interest rates and inflation is a key factor in economic policy, and ongoing adjustments to interest rates will likely continue shaping the financial landscape in Australia.
Where do we go from here?
That said, December’s inflation figure isn’t all bad news.
That’s because the RBA previously forecast that inflation would peak at 8% in the December quarter, so we are within range.
And, as the graph below shows, the RBA’s expectation is that inflation will decline gradually over the next couple of years to be a little above 3% by the end of 2024.
This might explain why all four big banks believe we’re now nearing the end of the latest interest rate tightening cycle with:
Commonwealth Bank predicting the cash rate will peak at 3.85% in April, before dropping to 2.85% by December 2023
- Westpac expecting the cash rate to hit 3.85% in May 2023, before dropping to 3.35% by June 2024
- NAB pencilling in a peak of 3.60% by March 2023 with it then remaining steady into 2024
- ANZ forecasting the cash rate will reach 3.85% by May 2023 before it eventually drops to 3.60% by November 2024
What does this mean for you?
As explained above, higher interest rates have been the main driver of the property market downturn.
So with the majority of the cash rate hikes hopefully now behind us, it could be a great time to buy an investment property (if your financial circumstances allow).
What’s more, all of Australia’s capital cities are landlord’s markets, with strong tenant demand and low supply, according to SQM Research.
Those conditions saw asking rents grow by a staggering 24.6% over the 2022 calendar year.
Want to buy an investment property? High Income Property can help you buy a positively geared property in a location with long-term growth prospects. To discuss your options, schedule an online meeting or (02) 8007 4001