RBA May 2022 rate decision

The RBA has finally pulled the trigger and put an end to all the noise around whether it wait until after the Federal election before hiking interest rates.

The central bank announced a rise of 0.25%, larger than what many anticipated, which means the official rate now sits at 0.35%.

Despite telling the media for a long time that there would be no rate rises until 2024 at least, the RBA found its hand was forced by soaring inflation, which hit 5.1% last week at a headline level.

The underlying inflation rate hit 3.7%, rising past the RBA’s long held target range of 2-3%.

The lift of 0.15% was the first official rise since 2010.

RBA Governor Philip Lowe said “now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

 

Where to for inflation?

The RBA expects more inflation in the short term, but believes the resolution of supply side issues will see it decline back towards the target range of 2-3%. However, Lowe flagged more rate rises ahead.

“The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4.75 per cent; by mid-2024, headline and underlying inflation are forecast to have moderated to around 3 per cent. These forecasts are based on an assumption of further increases in interest rates,” Lowe said.

 

What rate rises can mean for property?

Banks always seem to pass rate rises on in full, so you’d have to expect mortgage payments to go up as soon as possible.

As people pay more on their mortgage, they are likely to spend less money on other things, which may mean some of the shortages that are driving cost of living prices up may ease.

Also, rate rises tend to take some heat out of the property market, but it will be a while yet, and a few more hikes, before any real difference flows through to property values.

The RBA has shown it is reluctant to move aggressively and a lot of people have also fixed rates in recent times, meaning it will be two or three years until they begin paying higher variable rates.

There have been predictions of property value declines of 10% or more, but these would likely be the result of the cash rate passing 2%, which may take years and may not happen at all.

Large scale forced sales or defaults are also very unlikely as banks factor in a 3% rate rise buffer when assessing loan applications. So anyone with a mortgage now, even those who bought during the price surge of the pandemic, should be able to handle further rate rises for some time.

 

What rate rises mean for investors?

Investors already pay higher rates than owner-occupiers and most investors pay interest only on their loans.

Rate increases may see some portfolios that are positively geared be threatened by the possibility of going negative. However, tightening vacancy rates and soaring rents around the country will likely offset any extra repayment pain, as investors will be able to pass the costs onto their tenants.