RBA expected to raise cash rate by 50 bps in July and August – where and when will the cash rate settle and what are the implications for property prices?

The predictions on the RBA’s decision to increase the cash rate are now firming at 50 bps for the July 2022 meeting and we are now seeing adjusted expectations for August also at 50 bps.

It is also expected the increase will be immediately reflected in variable rates by all lenders and in many cases by more than the cash rate increase.

Wave Money Founder & Managing Director John Flavell says, “Following the May increase we were expecting rate rises each month somewhere between 15-25bps each step, the 50bps increase in June has readjusted those expectations”

“The bigger question now is where and when will the cash rate settle? There are many different views and positions with some calling 2% by the end of the year others calling 3% and some 4% and beyond by mid-2023, added Flavell.

“The rising cost of fixed-rate funding saw significant rate hikes of more than 1% across the board from two of the major banks last week and it is only a matter of time before the others will follow, suggesting the market does not expect the RBA to stop increasing the cash rate at 2.50 per cent”

Not wanting to add to the conjecture Wave Money wanted to spend some time considering the factors that will drive future moves.

In the May 2022 RBA Statement on Monetary Policy, Philip Lowe projected Australian GDP to grow by 4¼ per cent over 2022 and 2 percent over 2023. 

Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed.

The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of close to 5 per cent with a strong drive to curb inflation and stop the decline in consumer spending power and increased cost of living.

The expectation is that headline and underlying inflation come down to 3% in 2024 with further increases in interest rates. 

“On inflation, the question is, what regard if any will the RBA assign to inflation drivers, said Flavell. 

“Inflation at present is being driven more by supply as opposed to demand. Specifically enormous increases in fuel prices have been driven by both international and domestic events”

“The cost of fuel as a component of the cost of almost anything we consume is driving inflation significantly across the board - monetary policy is not likely to change fuel prices”

“Extreme weather i.e., flooding has decimated many food crops - monetary policy won’t make an iceberg lettuce any less expensive any time soon”

“Global supply chain issues are driving the costs up on just about everything we consume, and it is hard to see how monetary policy solves for this”

“If the RBA chooses to not consider the supply-side drivers of inflation, we cannot expect the cash rate to settle until such a time as the headline and underlying inflation settle at the stated target of 3%” added Flavell.

In Jan 2022 the national median house price went through $1m for the first time in history. That in itself is perhaps not so spectacular but what was more spectacular is the rate of the increase. 

By Jan 2022 there was an increase of 25.25% and more than 6% for the Quarter and the rapid increase in property prices was due in no small part to the reduced cost of credit.

“With so much of Australia's household wealth tied to the worth of residential real estate not creating shocks in the financial system and rapid declines in the worth of this pool of assets certainly has to be front of mind for the RBA as well as both State and Federal Governments and regulators,” said Flavell. 

“Accordingly, expectations are that there will be a series of taps on the brake peddle in the form of cash rate increments to bring inflation into check without crashing real estate prices”

With global uncertainty driven by conflict in Ukraine and uncertainty for growth in the Chinese economy born out of possible ongoing implications of COVID then the expectation is for increases in the cash rate will be more cautious and considered than not.

Going back to June 2002 the cash rate was 4.75%. Over this twenty-year period, the rate peaked in March 2008 at 7.25%. The mean cash rate over the entire period was more like 3.2%.

“All factors would seem to point to an increase in the cash rate to a level that is not inconsistent with the mean cash rate over the last 20 years with increases perhaps a little more moderate given sensitivity in relation to real estate prices and ongoing global uncertainty”

“Brokers are ahead of the curve and have been preparing for this outcome for some time. We believe that brokers are best placed to provide expert guidance and support to borrowers over this next phase of complexity in the economic cycle” added Flavell.

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About Wave Money

Wave Money is a new broker-exclusive non-bank lender established to deliver residential mortgage solutions to an increasing pool of borrowers whose needs are not being met by the traditional bank and non-bank lending institutions. Wave Money’s mortgage service proposition comprises best-of-breed technology for each stage in the process and the customer and broker experience is powered by onshore people, expertise, and relationships. 

About John Flavell

John Flavell is the Founder and Managing Director at Wave Money. Prior to Wave Money John held various senior executive roles in the financial services and residential mortgage industry including CEO Mortgage Choice, Executive General Manager Wealth Advice NAB, General Manager NAB Broker, National Manager Franchise and Retail Aussie, and State Manager (VIC) RAMS.