The Reserve Bank of Australia (RBA) has announced that it will raise the official cash rate to 3.85%. This comes after 10 consecutive rate hikes between April 2022 and March 2023, followed by a pause in April. The latest rate hike of 25 basis points may have come as a surprise to many, but according to RBA Governor Philip Lowe, “inflation in Australia is still too high at 7% and it will be some time yet before it is back in the target range.”
The future trajectory of interest rates in Australia is uncertain, but Philip Lowe has indicated that further rate hikes may be required down the track.
There are mixed forecasts from banks and experts about the future of interest rates in Australia. CoreLogic director Tim Lawless has stated that “the 25-basis point lift is likely to be the last in what has been the most rapid rate-hiking cycle on record”. However, forecasts from the four big banks are varied. Westpac and NAB predicted that the peak of the rate hikes would be in March at 3.60%, while CBA forecasted that this May hike would be the peak at 3.85%, and ANZ forecasted the peak to be at 4.10% in August.
Australians have a right to be weary of trusting these forecasts and talks of the rate cuts starting soon as the Governor Philip Lowe has previously stated in 2021 “the recent inflation data indicate that progress is being made towards the inflation objective”, and that it was “plausible that the first increase in the cash rate will not be before 2024.”
In addition to this battle with inflation the 2023 budget that will be rolled out in the second half of year has been quite generous and will likely put upward pressure on spending, there will be an increase of $40 per fortnight to all jobseeker, Austudy and youth allowance payments that’s intended to benefit at least 1.1 Million people, the designed purpose of this increase to help the beneficiary’s fight the rising cost of living which essentially means an extra $44 Million will be Injected into the economy every fortnight and is less likely to be saved.
Although it looks as though they may struggle to keep inflation under control in the second half of 2023, there is a fair argument that the increased spending mentioned above will be offset largely due to hundreds and thousands of Australians coming off their fixed rates in 2023 and 2024, the effects of the rate hikes have not been felt by many borrowers yet, and there is a good chance this will slow inflation down.
In light of this uncertainty, some individuals may be wondering whether now a good time is to fix their rate. Fixing your rate can offer certainty and peace of mind, with the ability to budget more easily. However, there are also disadvantages, such as not being able to benefit from rate cuts and break costs that may apply if you want to switch back to a variable rate in the fixed term.
In conclusion, interest rates in Australia are a significant factor in shaping the economy and impacting individuals and businesses. With inflation still high and the Governor indicating that more rate hikes may be required down the track, it is important to stay informed and be proactive in managing your finances. Whether you choose to fix your rate or ride out the variable until the rate cuts begin, it is essential to consider your individual circumstances and weigh the pros and cons before making any decisions.
If you would like to speak with someone about your financial future, reach out to the team at Wealthy & Wise today.
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