The RBA has lifted rates again. Here's why this should be the final hike
Australia just became become the odd one out.
At its meeting last week, the US Federal Reserve kept its official interest rate on hold. A week earlier, the European Central Bank and the Bank of Canada kept their rates on hold, and, at their meetings before that, the Bank of England and the Reserve Bank of New Zealand did the same thing.
Throughout the Western world – with perhaps Australia as the only exception – financial markets have been assuming central banks were done with increasing rates and would soon start pushing them down.
Reserve Bank Governor Michele Bullock’s statement accompanying Tuesday’s hike in Australia’s cash rate makes it look as if we’re about to join that club. It makes it look as if this hike from 4.1 per cent to 4.35 per cent – a 12-year high – will be the last.
And with good reason. Inflation has been falling almost everywhere, and – notwithstanding the recent uptick associated with higher oil prices – is forecast by the International Monetary Fund to keep falling.
The RBA has taken out insurance
So why did Australia’s Reserve Bank push up rates at all, at a time when none of its global peers were?
The statement makes it look as if it wanted to take out insurance.
While the bank still expects inflation to continue to fall, it says progress now looks “slower than earlier expected”.
Its revised set of forecasts, to be released on Friday, still have inflation falling, but to around 3.5 per cent by the end of next year, instead of 3.3 per cent, then to around 3 per cent by the end of 2025 instead of 2.8 per cent.
Inflation heading down throughout the Western world
The bank is particularly worried that the prices of services – things such as service in a cafe, done by hard-to-find workers – are “continuing to rise briskly”.
And it mentions “uncertainties” four times in eight paragraphs. It isn’t that it thinks inflation won’t keep coming down; it’s that it wants to be sure it is.
Australian hikes hit harder than in the US
One argument the bank hasn’t used – and nor should it – is catch-up. The US, the UK, the EU, Canada and New Zealand all have higher official rates than Australia.
But they are all are different to Australia, in an important way.
When the US Federal Reserve pushes up its Federal Funds Rate, nothing much happens to US home borrowers. Here’s why: almost all US home borrowers are on fixed rates, meaning their required mortgage payments don’t increase.
In Australia, only about one-third of home loans are fixed.
And US fixed rates are nothing like Australian fixed rates. The typical term in the US is 30 years, rather than the two to three years common in Australia.
This means that, as long as borrowers in the US don’t refinance or move homes, their payments are fixed for the entire term of their loans. Americans never have to pay more just because the US Fed jacks up rates.
At least when it comes to homebuyers, the US Fed has to do a good deal more than Australia’s Reserve Bank to have the same effect.
It means the US official rate of 5.25 per cent has less immediate effect on ordinary Americans than Australia’s new rate of 4.35 per cent will have on us.
That’s what the consumer spending figures show.
After a year of high US rates, American consumers are buying 2.9 per cent more goods and services than they were a year ago.
After a year of less-high Australian rates, Australian consumers are buying 1.7 per cent less.
This means that, as relatively lightweight as our previous 4.1 per cent cash rate had seemed, it might have been packing more punch than the higher 5.25 per cent rate in the US; and also the higher rates in the UK, Canada and New Zealand, where most of the mortgages are also fixed.
‘Painful squeeze’
In her statement, Governor Bullock acknowledged many households were experiencing “a painful squeeze on their finances”. She also noted others were benefiting from rising housing prices, substantial savings buffers and higher interest income.
Bank calculations suggest one in 20 variable-rate borrowers are now going backwards – paying more for essential expenses and housing than they earn.
(Source: The Area News)
