RBA issues its sixth straight rate hike as property prices fall

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.

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.”