The Reserve Bank of Australia (RBA) has handed down yet another official cash rate (OCR) increase. This time it was a 25 basis point rise up to 2.60% at its monetary policy meeting today on the 4th October. Exchange Settlement balances were also increased by the same amount to 2.50%.

It's the sixth increase in as many meetings and the sharpest incline of rates since 1994 when they were bumped 275 basis points over a period of six months. 

The size of the current increase came as a small surprise to economists, many of whom were predicting a 50 basis point bump and still see the need for further similar or smaller hikes until the end of the year. At this point, many agree that the RBA will potentially pause for a time to observe the full impact on the economy before making further adjustments as necessary.

The bank’s statement also warned of more increases in the months to come, as CPI  inflation is forecast to reach around 7.75% until the end of 2022, slightly above 4% in 2023, and then closer to the RBA’s mandate with 3% over the year 2024. 

In comparison to other major economies, Australia is in a fairly favorable position. The RBA appears more intent on protecting the economy from falling into a recession than some of its peers seem to be. 

The Federal Reserve has increased headline rates another 75 basis points in September with another high increase expected at its November meeting, pushing the dollar to record highs against other major currencies. The Bank of England is battling high inflation and high energy costs among other headwinds and has an extremely tight balancing act to walk to avoid recession. It's a similar story for the ECB.

Chart
Daily charts of the EUR/USD, the GBP/USD, and the Dollar Index - Source: ActivTrades’ online trading platform

How will the Australian property market respond?

One of the major considerations for the RBA will be how the property market responds over the next few months. 

According to the widely accepted home value index, CoreLogic, the value of property prices fell by 1.6% in August, and 1.4% in September so far this year. With the full impact of the OCR increases not being felt by mortgage owners until months later and new rate increases to come, it's not hard to see the market cooling off in a major way toward the end of the year.

The RBA’s own forecasting anticipates that real estate prices may drop as much as 15% from the peaks seen over the course of the pandemic. Some in the industry are predicting falls of over 25% in a few overinflated areas of the country. 

While interest rates are nowhere near as high as they have been in past decades in Australia, a large number of new and inexperienced mortgage owners that took advantage of the cheap lending options during the pandemic are already in trouble. Many bought into the assumption from the RBA’s Governor Lowe back in late 2021 that interest rates would not rise again until 2024, and they’ve been caught unprepared. 

Governor Lowe has faced criticism for the prediction. The Greens party at one point called for him to resign over the matter. 

Following an official speech in Sydney, Australia, Governor Lowe corrected a reporter, saying he had never promised that rates wouldn’t increase, and that the statement was conditional on the ongoing impact of the pandemic.

Still more room to move for the RBA before risking a recession?

Interestingly though, in August, the retail trade turnover actually increased by 0.6% across the board. Department store spending was up 2.8% and household goods were up 2.6% according to the Australian Bureau of Statistics (ABS). 

Some economists and the RBA are putting the increase down to the fact that many of the public were able to build up savings buffers during the course of the pandemic, and this might only be a short-lived boost to the retail sector.

The government's fuel excise tax cut, which reduced the cost of fuel to consumers by around 20 cents per liter, has also just expired, which will put more pressure on households, as the cost of energy increases in line with much of the developed world.

The RBA further acknowledged in its statement that the Australian economy was still growing despite the increasing rates and global uncertainty. The record level of the terms of trade being cited as a huge boost to the national income. Also, worth mentioning was the unemployment rate at 3.5% in August, and the continuous growth of wages to meet the very high demand for workers.

There are a few other concerning factors that the RBA will monitor as it makes other rate determinations in the months ahead. These will include the outlook for the global economy, which the bank described as “deteriorating,” the household spending habits of the public as monetary policy tightens, and the price-setting behavior of businesses and companies to ensure inflation does not become entrenched over the long term.

The RBA statement concluded by reiterating its responsibility to bring inflation back to the target range of 2-3%. Saying, “The path to achieving this balance is a narrow one and it is clouded in uncertainty.”

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66-79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. ActivTrades PLC is authorized and regulated by the Financial Conduct Authority, registration number 434413. ActivTradesPLC is a company registered in England &Wales, registration number 05367727. ActivTrades Corp is authorized and regulated by The Securities Commission of the Bahamas. ActivTrades Corp is an international business company registered in the Commonwealth of the Bahamas, registration number 199667 B. ActivTrades Corp is a subsidiary of ActivTrades PLC. ActivTrades Europe SA, Public Limited Company, is authorized and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. ActivTrades Europe SA is a company registered in Luxembourg, registration number B232167. ActivTrades Europe SA is a subsidiary of ActivTrades PLC.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

AUD/USD holds gains above 0.6800 on upbeat China's Caixin PMI

AUD/USD holds gains above 0.6800 on upbeat China's Caixin PMI

AUD/USD is trading close to multi-week highs above 0.6800, as traders digest an unexpected increase in the Chinese Caixin Manufacturing PMI. The US dollar is licking its wounds on dovish Fed's Powell and the China reopening optimism. 

AUDUSD News

EUR/USD bulls approach 1.0500 hurdle ahead of German Retail Sales, Fed’s preferred inflation data

EUR/USD bulls approach 1.0500 hurdle ahead of German Retail Sales, Fed’s preferred inflation data

EUR/USD stays on the front foot around 1.0435 while renewing its intraday top amid the broad-based US Dollar weakness during early Thursday. In doing so, the major currency pair extends the previous day’s run-up ahead of the key data from Eurozone and the United States.

EUR/USD News

Gold bulls eye $1,787 ahead of Federal Reserve’s favored inflation number

Gold bulls eye $1,787 ahead of Federal Reserve’s favored inflation number

Gold price begins December on a firmer footing around $1,768, after posting the biggest monthly gains in 29 months during November. The yellow metal’s latest run-up could be linked to the dovish comments from Fed Chairman Jerome Powell, as well as optimism surrounding China.

Gold News

TRON price faces major resistance at these levels, is a sucker's rally underway?

TRON price faces major resistance at these levels, is a sucker's rally underway?

TRON price (TRX) has retaliated considerably against the bearish onslaught witnessed in November. Despite the optimistic gesture, TRX price still faces significant barriers of resistance ahead. Traders should consider trading more conservatively near the current price levels.

Read more

December Santa rally springs alive

December Santa rally springs alive

U.S. stocks rose, hurtling ahead, putting those nasty thoughts of a bear market to bed as the December Santa Rally springs alive. Indeed investors are revelling in the afterglow of moderating Fed signals.

Read more

Majors

Cryptocurrencies

Signatures