Reserve Bank Maintains Cash Rate Offering Australians Temporary Relief Amid Inflation Concerns

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The Reserve Bank’s choice to maintain the cash rate stability has been hailed as a breather for countless Australians, following a series of 12 rate hikes in the past. However, this respite might be short-lived, as the central bank, while retaining the rate at 4.1% for the fourth month, has hinted at potential rate surges in the future to corral inflation within targeted limits.

Michele Bullock, the incoming governor, carried out her first resolution on Tuesday. This move has been generally applauded by economists, prominent among them being David ‘Kochie’ Koch, the Economic Director at Compare the Market. Despite conveying a somber outlook for the near future, Koch did not anticipate any further increments this year. He suggested that it wouldn’t be until late next year when rates might start to decline, prospective trends depending considerably on the September quarter inflation figures.

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According to Koch, the penchant for inflation to continue to ease would reduce the necessity of additional rate hikes. The Reserve Bank of Australia (RBA), however, would scrutinize the progression of property prices, the persistently heated employment scenario, and oil price trajectories. All these trends could potentially lead to inflation pressures, hence their keen surveillance.

The recent rate decision was made in the wake of new monthly inflation data, which indicated a surge in price pressure, a trend observed for the first time in four months. Fuel costs, rentals, and the labour-heavy service sector spearheaded the consumer price growth, which jumped to 5.2% in the year that ended in August, as compared to July’s 4.9%.

The bank’s board acknowledged the burgeoning influence of the cumulative 12 interest rate hikes since last May on the Australian economy. They asserted that the repercussions of the previous increases were yet to be fully absorbed. Consequently, giving more time to evaluate the impact of these rate increases on the economic landscape.

After all, the implications of interest rate changes usually take 12 to 18 months to permeate through the economy. Experts warn that the rise in fixed-rate lending during the pandemic might even prolong this tightening cycle.

Numerous Australians were transitioned to a fixed-rate mortgage during the record low-interest rates of the COVID-19 period; however, over half of those have now shifted to higher variable rates. An estimated one million more borrowers are slated to cross over in the next year and a half.

Treasurer Jim Chalmers carefully noted the concerns over this transition, acknowledging the pressure that borrowers are expected to endure. For those yet to cross over, Koch advised adjusting to a new household budget based on the higher interest rate, suggesting that this was the opportune time to review household expenses, inferring that a better deal could be possible on health funds, electricity provisions, or mortgages.

Pradeep Philip, Head of Deloitte Access Economics, commended Tuesday’s decision as the “right one”, offering households and businesses an opportunity to regroup in an economy slowly losing momentum. However, caution is warranted as rising interest rates amidst a dwindling economy, largely characterized by diminishing consumer confidence and a languishing retail sector, risk exacerbating the economic predicament. For now, the breathing space is welcomed, even as the necessity to remain vigilant to market trends remains.