Interest rate rise as Reserve Bank of Australia takes action, now at 3.6 per cent

In its March meeting, the Reserve Bank of Australia (RBA) decided to increase interest rates by 0.25 per cent, bringing the cash rate to 3.6 per cent. However, some experts warn that this tenth consecutive interest rate rise will cause “great pain” for Australians. 

This marks the highest interest rate level since May 2012, and RBA Governor Philip Lowe has suggested that more increases may be necessary in the future.

As a result, a $500,000 loan will see an additional $77 added to monthly repayments, with a total increase of $983 since the first rate hike in May 2022. 

This represents a 42 per cent increase in monthly payments. For a $1 million loan, which is the median house price in Australia, an extra $156 will be added to monthly mortgage repayments.

Experts express concern over RBA’s aggressive approach to contain inflation

Deloitte Access Economics Head Warns of Possible Recession 

inflation will increase

Pradeep Philip, head of Deloitte Access Economics, said despite acknowledging that inflation has peaked, that the economy is slowing, and wages aren’t the threat they thought they would be, the RBA Board has decided to lift interest rates again.

“This brings the cash rate to 3.6 per cent and with ten interest rate rises on the trot – with most not having had their full impact yet – it places further cost of living pressures on Australians while increasing the chance of an unnecessary recession,” he warned.

“The decision is the tenth consecutive increase since May 2022 and comes after National Accounts and CPI data released last week revealed that both economic growth and inflation have slowed faster than expected, making the wisdom of this decision hard to understand.

“Given interest rates attack inflation from the demand side, they are not fully effective in fighting inflation being driven by supply side issues. Unfortunately, the RBA has few other tools at its disposal to help fight inflation and has indicated further rate lifts are to come.”

Academic Erica Hall Warns Of Potential Recession As RBA Aggressively Raises Interest Rates To Combat Inflation

sign of recession

Erica Hall, an academic in behavioral finance at Deakin Business School, noted that the RBA is determined to contain inflation as quickly as possible.

“Their biggest fear is for high inflation to become entrenched, which is why they have been aggressively raising interest rates,” she said.

“Their monetary policy actions have already had a negative impact on house prices, disposable income, and net wealth. As we approach the end of the hiking cycle, the risk is that the RBA will overshoot and push us into recession.”

Meanwhile, Louisa Sanghera, the principal broker and financial director at Zippy, criticized the RBA for using a “sledgehammer” approach to the economy.

“Several economic indicators are now skewing softer, including rising unemployment, underwhelming wage growth and GDP, as well as home lending finance falling by a staggering 35 percent in the past year,” she said.

“While it is economically prudent for inflation to be curtailed, the Reserve seems to have taken a sledgehammer approach instead of showing a modicum of patience, even for a month or two, to analyze the impact of higher rates on consumer spending and the wider economy.”

She added that the consensus among economists is that the cash rate may have already been pushed too far, but it appears that the Reserve Bank board is turning a deaf ear to this possibility as well as the pain being experienced by mortgage holders.

Eleanor Creagh, PropTrack Senior Economist, discusses the impact of interest rate hikes on the Australian housing market

australian housing market

According to Eleanor Creagh, a senior economist at PropTrack, the housing market has quickly rebalanced due to substantial tightening, resulting in a drop in prices in most parts of the country from peak levels. She stated that prices nationally fell for nine consecutive months, currently sitting 3.9% below their peak in March, despite a 0.18% rebound in February.

Currently, sellers in the market are benefitting from low competition, as buyers vie for available stock, which has concentrated buyer demand and is supporting home prices to a certain extent.

Furthermore, she added that maximum borrowing capacities have decreased by 30% since rates started increasing, with further house price drops anticipated.

Compare the Market found that almost half of Australian adults stated they won’t be able to afford more rate increases. Of those surveyed, over 40% confessed that they would have to reevaluate their living costs, 2.8% would need to sell their property, and 3.1% are attempting to ignore the situation.

Stephen Zeller, Compare the Market’s general manager of money, stated that the recent developments were yet another dark day for many borrowers and would likely break the bank for those who were already struggling. With interest rates rising and fuel and gas prices skyrocketing, more households and businesses will likely struggle to meet their repayments. Zeller added that arrears percentages have increased with interest rates, rising from 0.65% in November to 0.76% in December, indicating that any additional buffers made during the pandemic may have been depleted.

According to analysis from Canstar, homeowners who are grappling with a 50% increase in repayments since April 2022 will need to work an additional 29 hours per month or 348 hours per year to make up the shortfall or find alternative ways to survive.

Australian Households will be Hit by the rising interest rates

australian households affected

According to Westpac CEO Peter King, rising interest rates are a “blunt tool” that are disproportionately impacting certain households amidst the skyrocketing cost of living in Australia. 

King highlighted that the effects of the rate hikes will be felt unevenly, with some households able to adjust and others struggling to survive. The Australian Council of Trade Unions (ACTU) has also called on the Reserve Bank of Australia (RBA) to halt interest rate increases, citing the difficulties faced by low and middle-income earners who are struggling to keep up with inflation while trying to make ends meet.

“Prices are through the roof, interest rates are going up, and depending on where you sit there will be opportunities to grow and prosper, or you may need to adjust to survive. So the impacts will be felt in a very uneven way,” he said in a speech to customers on Monday.

“The cost of living and inflation are serious challenges, and they’re hitting some Australians really hard. In response, the RBA is lifting interest rates, and we know that’s a very blunt tool that will be felt unevenly.”

According to NAB, ANZ and Westpac, interest rates are expected to reach a maximum of 4.1 percent, with increases projected for March, April, and May. The Commonwealth Bank, on the other hand, believes that rates will only increase to 3.85 percent.

Taking control of finances with the help of a financial advisor

In light of these developments, it is advisable for individuals to seek the assistance of a financial advisor. A financial advisor can help assess their current financial situation, identify areas of risk and suggest ways to mitigate it. 

They can also help individuals manage their debt, create a budget and plan for their financial future. With their expertise and guidance, individuals can take control of their finances and prepare for any challenges that may arise due to changes in interest rates.

BloomWealth is a team of trusted and highly-skilled financial planners based in Sydney.

We can help you take control of your financial future and fulfill your true potential. Get in touch with us to ensure you are equipped with everything you need to make informed financial planning decisions.

Leave a comment