Should the RBA now take a break on rate rises?

Another month, another super sized rate rise. After starting the year at 0.1 per cent, the cash rate now sits at?2.35 per cent,?the highest level in eight years. With the average mortgage sitting at $610,000, this has increased monthly repayments by $670 since the start of the year. With cost of living pressures also increasing, is it now time to take a pause on interest rate rises?

Interest rate rises are being used to slow down the economy and reign in inflation. We can see this impact most clearly on our own household budgets. As our mortgage payments rise, we have less money to spend on other things. Less spending reduces demand for goods and services and ideally will bring down inflation.

While our own spending habits have created high inflation, so too have many factors that are completely out of the hands of us, or the Australian government. The good news is that two of these are starting to show improvement. Petrol prices have been a major component of high inflation however since June 2022 the cost of crude oil has fallen 30 per cent. Blocked supply chains also appear to be easing –?the Baltic Dry Index, a measure of shipping costs, is down 70% from its peak in May. Less positive is that construction costs show no signs of easing and weekly advertised rents are now increasing at their fastest rate on record.

As to when rate rises will peak is hard to predict at the moment. Economic data is still highly variable. Looking at investor behaviour seems to be showing uncertain sentiment rather than movement based on economic fundamentals. For now, it is looking like a mid three per cent cash rate sometime early next year based on trading on the ASX Cash Rate Futures index. With the cash rate now sitting at 2.35 percent based on this, we are still in for a few more increases before rates start to stabilise.

This outlook for peak cash rate however could change dramatically if inflation comes down quicker than expected. Unfortunately we won’t know for sure until the end of October 2022 when September inflation data is due. This gives us one more interest rate decision before we know for sure what is happening to the inflation rate. Next month may be the time for the RBA to take a break and wait for a current read on what is happening to price rises.

Nerida Conisbee

Ray White Group

Chief Economist