9 Jun 2022
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What the latest rate rise means?
June 2022 - Article provided by PSK's Chief Investment Officer Chris Lioutas.
The Reserve Bank of Australia (RBA) surprised most lifting rates by 0.50% at their June meeting, taking the cash rate to 0.85%.
Market expectations were for a 0.25% rise with the upper range of expectations for a 0.40% rise.
The RBA either has 2 things in mind:
1. Inflation is heading higher than they previously thought and/or may be more entrenched than previously thought
2. Their rate hike window is a lot shorter than they previously thought which means they have a small window to get rates higher and build a buffer leading into the next economic downturn
We think the latter is more likely.
That means the RBA will need to get to their neutral rate setting (ie. neither expansionary or contractionary policy) quicker than previously thought which means faster and potentially bigger rate hikes in the short term before they stop themselves out, likely by the end of the year.
A range of economic data will be key to watch including inflation, wages growth, consumer and business confidence and sentiment, housing market indicators, debt arrears, etc.
In relation to the household balance sheet, whilst the average household has built significant equity over the last couple of years given strong price rises, it’s worth noting that:
1. The average household’s dollar debt has increased significantly
2. Whilst LVRs look pretty good, servicing costs are critical to watch
3. It’s not the average household that matters in a rising rate environment, it’s the marginal household
4. We have a predominately variable rate mortgage market which means RBA rate rises have an almost instant effect on mortgage rates.
With all that in mind, the RBA likely raises rates another 2-3 times before the end of the year before pausing or waiting for new economic data to see how far they can take rates beyond that without causing a significant decline in economic growth (ie. engineer a soft landing).
We think they won’t be able to get rates as high as the market is currently implying, that inflation likely settles lower from here but at higher levels than we saw pre-Covid.
Post the announcement, Australian equities fell, bond yields rose (prices lower), and currency is awash.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
PSK Financial Services Group Pty Ltd ABN 24 134 987 205 trading as PSK Private Wealth; is a Corporate Authorised Representative & Credit Representative of Charter Financial Planning Limited, ABN 35 002 976 294. This document contains information that is general in nature. It does not take into account theobjectives, financial situation or needs of any particular person. You need to consider you financial situation and needs before making any decisions based onthis information.
