Home » News » The Reserve Bank of Australia Increase the Cash rate to 0.85%
7 Jun, 2022
The Reserve Bank of Australia Increase the Cash rate to 0.85%
At the Reserve Bank of Australia’s June meeting, a decision was made to increase interest rates by 50 basis points (or 0.5%) to 0.85%.
In announcing the decision, Reserve Bank governor Philip Lowe said the rise was in response to the fact that “inflation in Australia has increased significantly”.
Higher housing construction expenses and fuel prices drove annual inflation up to 5.1% in the March quarter. In addition, global factors, including COVID-related disruptions to supply chains and the war in Ukraine, also added to this increase in inflation.
Source: Louie Douvis
Dr Lowe said while Australian inflation was lower than that of most other advanced nations, it was nevertheless higher than the RBA had anticipated.
“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” he said.
“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.
“Today’s increase in interest rates will assist with the return of inflation to target over time.”
Inflation is likely to rise again this year, but the rate is expected to decline to 2–3 per cent next year.
What has happened to the Australian economy over the past couple of months?
The ongoing conflict in Ukraine is driving up fuel and electricity prices not only in Europe but worldwide. Furthermore, the cost of shipping goods and supply chain interruptions have pushed up inflation across the globe.
In Australia, the cost of living skyrockets, resulting from the rising cost to import products and agricultural commodities from significant exporters such as China.
However, we saw the Australian economy grow by 0.8% in the March quarter and 3.3 % year on year, highlighted by an increase in business investment and a significant construction pipeline set to be finished soon.
Furthermore, employment has increased, and the unemployment rate has dropped to 3.9%, the lowest in nearly 50 years! The unemployment rate is expected to fall to roughly 3.5% in early 2023 as economic conditions improve.
However, it is hard to deny that there is some uncertainty about how this will influence household wealth and spending, given the increasing pressure on household budgets from higher inflation.
May’s Property Market Overview
Throughout May, the housing market conditions became more varied in comparison to previous months.
According to Corelogic, prices declined slightly in Sydney and Melbourne. However, the price rise remained strong in most other capital cities and rural areas, aided by a lack of available properties for sale.
Source: CoreLogic Home Value Index – Released 1 June 2022
The rapid change in inflation and interest rate environment has had a big impact on the outlook for Australia’s property markets, pulling forward and steepening the forecast price slowdown.
Most economists expect the RBA to lift the cash rate to 2.25% by May 2023, far sooner than forecasted at the beginning of the year.
While the interest rates are a key factor in future housing market outcomes, there will be several other underlying factors that can affect our property market:
Population growth – Over the past two years, the population growth within Australia has slowed. However, this will gradually increase as borders start to reopen and we have a wave of migration into Australia with the forecasted Australian population growth rate of 1.3% annually.
A decline in supply – Due to limited access to building materials and resources, development project completions are likely to fall far short of the long-term demand for residences. We will continue to have a housing shortage, particularly in our densely populated capital cities.
While housing value growth has slowed, rents continue to rise – According to CoreLogic’s Hedonic Rental Index, national rental value increased by 1.0% in May, pushing the annual change in rents to 8.8% across the combined capital cities.
Although several areas’ property values have fallen in recent months, particularly in May, the majority are still more than 25% higher than they were before the pandemic.
What does this mean for you?
According to PropTrack economist Paul Ryan, potential first-time home buyers will find the rising rates beneficial to their house ownership objectives.
“Firstly, housing prices, either growing more slowly than they have – and we’ve already seen that through this year – or even falling a little bit, tends to help first home buyers,” Mr Ryan said.
“Often, first-time buyers are limited by how big a deposit they can save. So when the level of prices is high, saving 20 per cent of that level can become more onerous for them.”
Growing interest rates will have an impact on rising rental costs, which combined with decreasing vacancy rates, means now is a perfect time to switch from renting to buying.
If you’re still undecided about where or what to invest, buying off the plan is a terrific way to get started.
Contact us below to see what is currently on offer.
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