At the beginning of 2022, the official cash rate was a mere 0.1%. However, it has now climbed to 3.135% with the potential to expand further. Since the Reserve Bank of Australia (RBA) commenced its increase of the cash rate in May 2022, there have been a total of 9 interest rate increases throughout the year, bringing the sum to 3.35%.

You can see a very interesting chart on the RBA site here.

Despite Dr Philip Lowe, the head of the RBA, forecasting a delay in increasing official interest rates until 2024 amidst the Covid-19 pandemic, increases have still taken place.

Due to a long spell of low-interest rates, many Australians decided to take on large mortgages to purchase property, leading to a surge in market prices. Consequently, a considerable number of borrowers may now be facing mortgage stress. This is especially likely to be the case for those who are due to expire their fixed-rate mortgages and switch to a variable rate.

So why did interest rates begin climbing earlier than anticipated, will they persist to ascend, what could bring the surge to a halt, and when they might begin to decrease?

WHAT FACTORS COULD BE CONTRIBUTING TO AN INCREASE IN INTEREST RATES?

• After the pandemic, people have been eager to use the money they had saved and are now seeking out physical items.
• Suppliers are struggling to keep up with the shift in consumer preferences and the increased demand.
• Real Estate prices all over Australia surged to unsustainable levels
• The Ukraine-Russia confrontation has caused restricted access to oil and gas supplies, leading to disruptions in the production of certain goods and the disruption of supply chains.

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The RBA has a particular focus on the first two factors, noting that the divergence between domestic demand and productive capacity is at the root of inflationary pressures.

Core inflation rates are already above 6%, which is higher than the RBA’s target range of 2% to 3% for maintaining balance between supply and demand.

Raising interest rates is a powerful way to curb inflation because it has an effect on the majority of people in Australia.

Higher interest rates make it more expensive to service any loan, from a mortgage to a business loan, which in turn can lead people to become more conservative with their spending. Even those without any debts can be influenced by the signal of increasing interest rates, thus curbing their spending.

The past year’s rise in interest rates has been a surprise considering they have remained so low for so extensive a period. The RBA last lifted interest rates in 2010 and the last time there was a comparable surge in such a short amount of time was way back in 1994.

When the economy demonstrated resilience in the wake of Covid-19, the only question left was “how much and how fast the rates would increase, not if the rates were going to increase”.

IS THERE A POSSIBILITY OF FURTHER INTEREST RATE INCREASE?

Yes. RBA had a rate rise in Feb 2023. I assume throughout 2023 there will be at least 4 more. Possibly March, May and Aug.

Referring to the higher-than-expected consumer price index for the December quarter in Australia, combined with the apparent resilience of household spending during the festive season, the government have stated that they no longer believe a 3.35% cash-rate would be sufficient to bring the country’s inflation rate back to the target this cycle.

IN ORDER TO FACILITATE LOWER INTEREST RATES, WHAT STEPS MUST BE TAKEN?

In order for interest rates to begin to decrease, inflation would need to be on the path to 2% to 3%, but also that unemployment must climb and the economy has to become weaker.

Projections indicate that both the US and Europe are headed for a recession, and China, a major trading partner of Australia, is experiencing a decelerated growth rate. Therefore, the international economic situation will have an influence on Australia.

The International Monetary Fund (IMF) has expressed their opinion that Australia is not exempt from the challenges of an international downturn. According to the IMF’s recent assessment of the Australian economy, potential risks to growth could arise from a global recession, ongoing inflationary pressures, and an increase in geo-economic divisions.

The prospect of a recession in Australia due to the speed of recent rate increases and a world-wide economic slowdown has become a much discussed topic. According to the IMF, this year the growth of the Australian economy will decline from 3.6% in 2022 to 1.6%.

TO WHAT EXTENT WILL INTEREST RATES DECREASE?

It is improbable that, when rates begin to decline, that they will go as low as what Australians have been used to seeing in the recent past.

I’d assume when they do decrease they should settle around the 3% mark for an extended period of time.

HOW WILL INTEREST RATES AFFECT THE REAL ESTATE MARKET ON THE SUNSHINE COAST?

I assume as interest rates continue to rise throughout 2023 sales prices will continue to fall. Since Around July 2022 until now some suburbs have already seen a 15% drop in prices. In the last ¼ of 2023, many people would then be under mortgage stress creating greater urgency for a sale.

WHAT SHOULD EVERYONE BE DOING NOW TO BUDGET FOR THESE INCREASES?

In addition to tightening budgets. Most people will have the ability to save considerable money by refinancing. Often this can be done by staying with the same bank. It can be an easy process. I would suggest you reach out to Chris Wilson who is an award-winning mortgage broker on the Sunshine Coast. He can offer anyone this service for free.