Interest Rate 2022 -2023 Outlook
Interest Rate 2022 -2023 Outlook
The 3rd May 2022 will it go down as a momentous day in the financial history of Australia. The weekend news was littered with the opinion of doom and gloom (relating to interest rate rises) and the effect of what interest rate rises will have on the economy.
Today we have seen the first interest rate rise in 11 years! The Reserve Bank has today increased the cash rate to 0.35%, an increase of 0.25%.
In addition, they noted the potential for further increases with suggestions of another 0.25% or even a 0.35% rise in June 2022.
Why is there pressure for interest rates to rise?
Interest rates are the Reserve Bank of Australia's (RBA) primary tool for controlling the economy. The Governor of the RBA and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 percent, on average, over time. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making and serves as an anchor for private-sector inflation expectations.
To achieve the growth target over the past two years during the covid pandemic, the RBA dropped interest rates (the rate banks can borrow) to an all-time low of 0.1%. This continuous stagnation of interest rates has led Australian banks to variable loans (Owner occupied) variable rates of around 2%- 2.5%.
Last week RBA Reported that inflation for the March Quarter is 5.1%, 2.1% above the target range. The alarm bells are ringing! The RBA doesn't just look at the one factor, though; they also look at the Employment figures – how many Australians are not in work and how many jobs are being advertised. This information will be available next week. It also looks at earnings inflation. If costs increase by 5%, then income is also increasing by 5%. If not, then the average Australian's income is effectively reduced by 5% - meaning their buying power is considerably reduced.
In addition, the RBA needs to understand what is driving the inflation rate or CPI (Consumer Price Index). This is the assessment of what the average Australian spends on basic living expenses, eg shopping, utilities, transport etc.
One of the main factors driving inflation is the increase in fuel cost. It is a direct cost, eg, when you fill your car, but it also affects the amount you pay for groceries as transport is a significant part of the supply chain.
So, clearly, at 5.1%, the RBA needs to do something to slow the economy, and increasing interest rates from their all-time low seemed to be what is required.
But how much does the RBA increase the interest rate?
HISTORICALLY, the RBA does not move that quickly, nor does it want to cause economic issues, so as a general rule, increases are likely to be measured and gradual.
If you have been following the Chief Economists from the Big 4 Australian banks, they believe we will need increases of between 2 and 3 % over the next 2 to 3 years.
However, what effect will this have on the average Australian?
If we look at the maths, the below table provides an indication of the monthly increase in cost of various loan amounts:
Reserve Bank Governor Philip Lowe said, "the combination of recent very high inflation numbers and evidence that workers were starting to get bigger wage increases as a result of a low 4 percent unemployment rate meant that the time was right for "normalising" interest rates away from emergency lows."
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time," he noted in his post-meeting statement.
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