RBA Governor, Michele Bullock
The official interest rate is 4.35 per cent. Image: RBA.
  • The official cash rate has been raised to 4.35%.
  • Experts noted that inflation is still too high at 5.4%.
  • Latest rate rise unlikely to deter home price growth.

After four months of pauses, the Reserve Bank of Australia has raised the official cash rate by 25 basis points to 4.35%, delivering a fresh dose of cost of living pain to Australian mortgage holders.

RBA governor, Michele Bullock, said “Inflation in Australia has passed its peak but is still too high and is proving more persistent than a few months ago.”

Bullock noted that while the latest reading on CPI inflation indicates that goods price inflation has eased further, the prices of other services continue to rise at a brisk pace.

“While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than expected,” she said.

“The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

Michele Bullock, RBA

The latest data indicates that Australia’s annual rate of inflation is sitting at 5.4%.

Interest rate rise drivers

CoreLogic research director, Tim Lawless, noted a couple of other factors, aside from inflation, that influenced the latest RBA decision.

“Persistently tight labour market conditions as well as a pick up in the volume and value of retail spending were probably additional factors supporting a decision to lift rates, alongside concerns that higher housing prices could be contributing to a mild ‘wealth effect’, where home owners feel more willing to spend,” he said.

“The lift in rates combined with ongoing cost of living pressures and alarming geopolitical environment is likely to weigh on consumer sentiment, which is already in deeply pessimistic territory.”

Ray White chief economist, Nerida Conisbee, observed that the main current drivers of inflation are housing costs, including rent and construction, electricity and fuel.

“Fuel prices are being driven upwards by restrictions to production by Russia and Saudi Arabia, as well as the Israel/Hamas conflict,” she said.

Silver linings of the latest rate rise

PropTrack senior economist, Eleanor Creagh, noted that record levels of net overseas migration, a challenged rental market, limited housing stock and a slowdown in the completion of new builds are offsetting the impacts of substantial rate rises and the slowing economy, with home prices continuing to lift.

“This additional increase in interest rates may slow the current pace of home price growth but is unlikely to deter these gains, with strong population growth, tight rental markets and a housing shortfall fuelling further price rises.”

Colliers Gold Coast director in charge, Steven King, predicted that retirees looking downsize will be happy with the latest rate rise, as it will free up equity that can boost bank accounts and take advantage of higher bank interest rates.

LJ Hooker head of research, Matthew Tiller, agreed and said positive selling conditions will give stretched mortgage holders options.

“We don’t expect a wave of forced sales but homeowners who have to sell due to financial reasons are going to achieve a better result now than what they would have at the start or middle of the current cycle of interest rate increases.”

Matthew Tiller, LJ Hooker

Tiller added that current conditions stand in stark contrast to a year when appraisal numbers rose but homeowners lacked the confidence to sell, due to falling prices, resulting in a lacklustre spring market.

Momentum Wealth managing director and past president of REIWA, Damian Collins, said with low levels of supply and strong migration, house prices continue to climb and properties are selling at record speed in some parts of the country.

The feedback loop

Conisbee observed the latest rate rise as one component of a feedback loop.

“We are not building enough homes and investors aren’t as active as they need to be to increase the number of rental homes,” she said.

“Interest rate rises are making this worse – fewer homes being built and too few investors are coming into the market.

“Worse is that it is also reducing the number of rental homes as investors sell and also reduces the pipeline of new stock as developers find it harder to get projects up and running.

“It is also creating a feedback loop – rents are rising, increasing inflation , this increases interest rates, this in turn leads to even more rent rises, further fueling inflation and even more interest rate rises.”

Zippy Financial director and principal broker, Louisa Sanghera, expressed consternation regarding the RBA’s decision.

“Many of the new or existing borrowers we speak with have absolutely no chance of refinancing, with a lot of them technically not servicing their current debt levels,” she said.

“Over the past two months in particular, borrowers are becoming more desperate with many homeowners turning to interest-only repayments as the only way the can continue to hold on to their homes.

“Unfortunately, their current lenders don’t necessarily offer interest only to owner-occupiers – and they can’t refinance – so they may need to sell or opt for a repayment pause to to keep the roof over their heads.”

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