RBA increases cash rate to 3.85%
This week’s big news was the Reserve Bank of Australia’s (RBA) decision to increase the cash rate from 3.6% to 3.85%. The following chart clearly shows that this cycle of interest rate rises is the most significant since the early 1990s.
The RBA has got itself in a real pickle over the past couple of years (e.g. interest rates won’t rise till 2024), and this week’s announcement shows they are making a habit of it. The decision to leave rates on hold in April is a significant reason for the confusion. The RBA stated that the main reason for leaving the rates on hold was to allow more time for the effect of increased interest rates to work through the economy.
Well, they only waited one month! Furthermore, during that month, inflation, the RBA’s key indicator of whether to increase or decrease rates, had fallen. However, the RBA also said in April that rates would rise again to help bring inflation into the 2-3% target range as quickly as possible (without sending the economy into recession).
So there appear to be two conflicting messages. Firstly, the pause in April left the impression that if inflation continues to fall, which it has, then a further pause would let the effect of higher rates continue to work through the economy. Secondly and conversely, the RBA said we must keep raising interest rates because quarterly inflation at 7% is still well above the 2-3% target range.
No wonder the consensus among economists was an each-way bet.
The news shocked the financial markets that predicted rates would remain unchanged. The futures market in the chart below indicated a strong probability that rates would be on hold until the year’s end, with the prediction in the solid blue vertical bars remaining level with the current RBA cash rate in the horizontal dashed blue line. The ASX also experienced a sudden drop when the rate rise was announced.
Despite this month’s increase, if next month’s inflation figures fall again, which is highly likely, then rates will almost certainly remain on hold in June.
With increasing house prices, interest rates are not holding back Perth’s property market. Perth prices rose by nearly 0.3% for the week, the most significant gain for a couple of months, and as the following chart shows, the curve suggests price growth is steepening. REIWA’s forecast for house price growth was the most optimistic prediction at the start of the year, but based on the current trends, they, too, may have underestimated the market.
With the low dwelling supply and unemployment levels, Perth will likely be on the verge of serious price increases as migration increases and interest rates pause.