- Cash rate up 0.85 of a percentage point in two months
- Previous cash rate was an emergency low
- Monetary policy needed to be less accommodative
The number one topic of conversation of late has certainly been interest rates, hasn’t it?
The increases of 0.35 and 0.50 percentage points by the Reserve Bank of Australia (RBA) in May and June appears to have been turned into something that it is not – because it is merely a sign of more normal monetary policy.
Time will tell what role the emergency cash rate setting of just 0.1 per cent played in the strong market conditions during the pandemic because it was also a period of a significant undersupply of property listings for sale as well.
However, a cash rate of 0.1 per cent was without precedent because our nation and the globe were fighting a pandemic, which had an outcome that was unknown for our population as well as for our economy for the best part of two years.
Emergency rate setting
Over that time, homeowners and investors had the benefit of historically low mortgage repayments as interest rates hit about two per cent for many mortgage holders.
Part of the reason for such low rates was to provide support to our economy during those turbulent times, including making sure people could easily afford to make their repayments and have more money in their bank accounts, too.
But there was always going to be a time with interest rates started to normalize because the threat wasn’t as imminent anymore, and our economy was recovering.
That time is now because when the cash rate is set at an emergency level, that is actually a sign that the economy needs a lot of support.
Since the GFC, for those of us who have been in the industry for that long, interest rates have been at historic lows.
This was mainly because inflation was stubbornly low – the target rate is two to three per cent – for a variety of factors. With inflation low, that meant that the growth of wages was missing as well.
The extraordinary stimulus measures that were put into place during the pandemic were always likely to have a temporary inflationary impact if our economy recovered more quickly than expected – which is currently the case.
The Reserve has been clear that it is time to return to a less accommodative monetary policy setting and that it only expects inflation to be high temporarily.
Both of these factors are important for prospective homebuyers and sellers to understand so that they don’t start believing some of more the alarmist headlines circulating at present.
Rates forecast to remain low
According to Westpac, they believe that the cash rate will continue to be increased over the next two years to settle at about 2.25 per cent in May 2024. This means that the interest rates on mortgage may be about five per cent.
To put this into perspective, this is not dissimilar to the interest rate that the majority of us were paying prior to the pandemic darkening all of our doors.
The Brisbane and Sunshine Coast property markets remain two of the strongest in the nation, with robust demand from buyers and a tight supply of listings still occurring.
We are also benefiting from the lion’s share of interstate migration, a plethora of major infrastructure projects as well as the 2023 Brisbane Olympics.
This is why a return to average interest rates is nothing to fear – rather, it is a sign that our economy is firing back up… and that is something that should always be celebrated.
