Home buyers should enjoy their high-priced Easter eggs and butter-soaked hot cross buns this weekend because the Reserve Bank has not finished inflicting pain just yet.
While the RBA did not increase official interest rates at its regular meeting for the first time in a year, it certainly left open the option for tighter monetary policy in the weeks and months ahead.
Governor Philip Lowe, explaining the bank’s decision to leave the cash rate at 3.6 per cent, made clear the biggest factor in its thinking was the turmoil out of the United States and European banking systems.
The fears of a global-wide credit squeeze due to the collapse of Silicon Valley Bank and Credit Suisse – think of a repeat of the global financial crisis – were enough for the RBA to hold fire this time.
The man who has copped plenty of criticism for saying that interest rates were unlikely to move until 2024 made clear that home buyers should not believe today’s decision was the beginning of an extended period without rate increases.
“The board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” Lowe said.
“The decision to hold interest rates steady this month provides the board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.”
The reasons for further interest rate rises are clear. While inflation is likely to have peaked, the bank is still forecasting CPI won’t be back to 3 per cent until the middle of 2025. Remember, the bank’s remit is to have inflation between 2 and 3 per cent.
Unemployment remains extremely low even with a little softening in job vacancies.
But Lowe understands the dangerous game the RBA, and other central banks, are playing.
“There is further evidence that the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a substantial slowing in household spending,” he said.
Already, the bank is in its most aggressive tightening of interest rates since people were listening to Fine Young Cannibals in the late 1980s. In 10 meetings, it has taken the cash rate from 0.1 per cent to 3.6 per cent.
In dollar terms, for a person with a $600,000 mortgage, that’s almost $1200 in extra monthly repayments.
But the impact of those rate rises have yet to flow through, with banks one to two months behind in passing them on in full to customers.
The longest tightening period by the bank was between 2002 and 2008 when, across 12 separate moves in almost six years, it lifted the cash rate by 3 percentage points to 7.25 per cent.
Mortgages were substantially smaller – in NSW alone, the average loan was $332,000 compared with today’s $726,000. Fortunately, inflation was also much lower.
The long period over which interest rates were increased meant people could accommodate the larger repayments.
That’s not the situation now. The bank concedes it expects below-trend growth for the next couple of years. If not for population growth, there would be every chance of a recession.
For many home buyers and business operators, the RBA’s rate pause is a good thing. But it may only be short-lived.
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