Just How Likely is a Rate Hike?

As the Australian property market continues to grapple with rising inflation, speculation is mounting over the possibility of another interest rate hike by the RBA. The recent release of the inflation data for the year to May, which hit 4%, has fuelled concerns among economists and market watchers alike. This figure exceeded expectations and represented the highest rate of the year so far, raising alarm bells about the RBA's next move.

Inflation is a critical factor for the RBA when determining interest rates. The central bank's target range for inflation is between 2% and 3%, but the latest figures show that we are still well above this target. Despite earlier predictions that the RBA might begin to cut rates, the persistent rise in inflation suggests otherwise. Analysts now believe that instead of a cut, we might see another rate increase, possibly as early as August.

Property Market Reaction

The property market, a key indicator of economic health, has shown mixed responses to the current economic conditions. Over the past year, national home prices have risen by 8%, with Perth leading the charge at a staggering 23.6% increase. Other cities like Brisbane and Adelaide also saw significant growth at 15.8% and 15.4%, respectively. However, Sydney and Melbourne experienced more modest gains, with Sydney up 6.3% and Melbourne at just 1.3%.

Despite these impressive numbers, there are signs that demand is weakening. The June quarter saw a rise in national home values by 1.8%, a slowdown from the 3.3% increase seen the previous year. This deceleration could be a precursor to further cooling, especially if interest rates rise again.

The Impact of Another Rate Hike

An increase in the RBA cash rate would have significant implications for the housing market and borrowers. Higher rates mean increased monthly mortgage repayments, which could surpass $4000 for the average loan size. This rise would place additional financial strain on homeowners and could dampen housing demand further. As the cost of borrowing increases, the appeal of renting over buying may grow, particularly as the rental market remains tight and rents continue to rise above average levels.

Economic Indicators to Watch

The RBA’s decision will hinge on various economic indicators, including the quarterly inflation figures, the labour market report, and retail sales data. While the monthly CPI indicator has been a point of concern, the RBA has indicated that it would be a mistake to base decisions solely on this metric. Comprehensive data from these additional sources will provide a clearer picture of the economic landscape and influence the RBA's decision-making process.

Market Predictions

Financial experts and institutions are divided on the likelihood of a rate hike. Some, like Canstar's financial services group director and Deutsche Bank, are confident of an increase in August. Others, including major banks and financial analysts, suggest that the first rate cut may not occur until early to mid-2025. The consensus, however, leans towards at least one more rate hike before any potential cuts.

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