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Australia interest rates rise: End of ultra-low interest rate era?

By Mensholong Lepcha

Edited by Jekaterina Drozdovica

16:14, 2 August 2022

Australia interest rates rise: End of ultra-low interest rate era?
Reserve Bank of Australia name on black granite wall in Melbourne Australia with a reflection of high-rise buildings. Photo: EyeofPaul / Shutterstock.com

The Reserve Bank of Australia (RBA) raised interest rates for the fourth consecutive month, hiking them by 50 basis points (bps) in its August meeting. Up until May 2022, the RBA held a tolerant stance towards inflation as the central bank maintained its accommodative policy in the hope that supply-side inflation would ease.

However, as inflation hit multi-decade highs due to strong demand, the RBA made a hawkish pivot and hiked rates by 175 bps in the last four months. Here we take a look at Australia’s interest rates rise and analysts’ outlook on RBA’s rate hike cycle.

What is RBA?

The Reserve Bank of Australia (RBA) is Australia’s central bank. It oversees the nation’s monetary policy, manages gold and foreign exchange reserves, and issues the nation’s currency (the Australian dollar (AUD)).

RBA roots lie in the Commonwealth Bank of Australia (CBA), which was established in 1911. In 1959, the Reserve Bank Act 1959 enabled the RBA to carry out central banking functions.

There are two boards in the RBA. The Reserve Bank Board oversees the nation’s monetary policy and financial stability, while the Payments System Board oversees matters relating to payments system policy.

The Reserve Bank Board meets 11 times a year on the first Tuesday of each month, except in January. Board meetings are usually held in the RBA’s head office in Sydney. The Reserve Bank Board comprises nine members, which including the governor or chair, deputy governor or deputy chair and the secretary to the Treasury.

The governor and deputy governor are appointed for terms of up to seven years, and are eligible for reappointment. As of 2 August 2022, Philip Lowe was the RBA chair and Michele Bullock the RBA deputy chair.

Australia interest rates history: End of ultra-low interest rates 

The RBA’s role as a monetary policy regulatory is a critical one, as it involves setting the interest rate on overnight loans known as the cash rate in the money market. Australia’s interest rates play an influential role in the behaviour of the country’s borrowers and lenders, economic activity, inflation rate and currency stability.

To meet its goals of economic prosperity, currency stability and full employment, the RBA has an “inflation target” that seeks to keep consumer inflation at 2% to 3% on average “over the medium term”.

According to the RBA, an inflation rate of 2% to 3%, on average, is “sufficiently low” and seeking to achieve this rate serves as an anchor for private sector inflation expectations. The RBA discusses and sets the cash rate at its board meeting which is held on the first Tuesday of every month.

“The cash rate is the rate that banks use to lend to one another in a short-term money market, but it has a very large effect on mortgage rates in the economy, on the rates that people get on their savings, and affects asset prices and the exchange rate, so it's a very important interest rate,” explained RBA governor Philip Lowe.

In 2020, the RBA cut interest rates to near-zero levels in a bid to support its domestic economy battered by the Covid-19 outbreak. The cash rate was lowered from 0.75% from the end of 2019 to 0.1% by November 2020. 

Reserve Bank of Australia’s (RBA) interest rates, 2012 - 2022

The 0.1% cash rate was maintained by the RBA throughout 2021. The economy was also supported by a $100 bn government bond purchase programme that started in November 2020.In the first quarter of 2022, the RBA reiterated its stance of maintaining an accommodative monetary policy even though inflation had accelerated due to high commodity and energy prices. 

“While inflation has picked up, it is too early to conclude that it is sustainably within the target band,” the central bank said in March 2022.

The RBA pivoted from its dovish stance in May 2022 as it hiked cash rate by 25 bps to 0.35% and said it was time to withdraw the “extraordinary monetary support” put in place to help the Australian economy through the pandemic.

In June and July, Australia saw back-to-back 50 bps rate hikes which took the cash rate up to 1.35%. 

Strong demand supported by near-50 year-low unemployment, combined with supply side issues sparked by the Russia-Ukraine war, lifted Australia's inflation rate to its highest since 1991 by July 2022.

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“That robust recovery has taken place and the time for ultra-low interest rates is now behind us given that inflation is high and the labour market is very tight,” said RBA governor Philip Lowe on 20 July. 
“For inflation to return to the 2–3 per cent target range, a more sustainable balance between demand and supply is needed. Higher interest rates will help achieve this through moderating growth in aggregate demand,” added Lowe.

Latest RBA meeting: Australia interest rates rise by 50 bps

On 2 August, the RBA hiked Australia interest rate by 50 bps for the third straight month after the headline inflation rate came out way above the central bank target range at 6.1% for the June quarter.

Governor Lowe said in a statement that inflation is expected to peak “later this year” as the ongoing resolution of global supply-side problems, fall in commodity prices and impact of higher Australia interest rates begin to take effect.

According to the central bank's consumerger price index (CPI), inflation is expected to be around 7.75% over 2022, stay above 4% over 2023 and ease to 3% over 2024.

“The RBA sees growth in demand outstripping supply at present, and they want to get rates into neutral territory as soon as is practicable. However, there are already signs of softer momentum in household spending and the RBA have downgraded their expectations for growth this year and next,” said Sean Langcake of Oxford Economics.

In its statement the RBA highlighted the “behaviour of household spending” as a key source of uncertainty with higher inflation and higher Australian interest rates putting pressure on household budgets.

What is the interest rate in Australia? As of 2 August 2022, the cash rate stood at 1.85%.

Analyst views: Australia interest rates forecast

The question now remains: will interest rates rise in Australia or will we see a monetary policy pivot in the future? Looking ahead, the RBA said on 2 August that it is not on a “pre-set path” in its “process of normalising monetary conditions over the months ahead”. 

Economic data remains key as the size and timing of future rate hikes will be guided by the figures on the health of the economy. 

Preliminary estimates for the index of commodity prices released on 2 August showed that effects of rate hike have begun to show as the index fell by 8.5% on a monthly average basis in July.

However, the index remained just below all-time high levels and the preliminary reading for July 2022 came out higher than that of February 2022.

RBA index of commodity prices, 1992 - 2022 SDR, 2020/2021 average = 100

With regards to an Australian interest rates prediction, UK-based advisory firm Oxford Economics said that it now expects the RBA to hike rates by 50 bps again in September.

“Recent communications from the Bank confirm that the board sees the neutral policy rate at or just above 2.5%,” said Oxford Economics.

David Plank of ANZ Research held a similar view and expected the RBA to hike rates by 50 bps which would be a fourth half-a-percent Australia interest rates rise in a row.

“The key change from July is that there is no longer any reference to the withdrawal of “extraordinary monetary support.” Rather the statement describes the move as a “further step in the normalisation of monetary conditions in Australia,” said Plank.

Analysts at Westpac IQ said another 50 bps hike in September looks certain. “However, there were references that might imply a more cautious approach after September and we see them as consistent with our view,” said Westpac IQ and indicated that a series of four 25 bps hike will be required for the RBA to meet its inflation target goals.

Note that analyst predictions may be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never trade or invest money that you cannot afford to lose. 

FAQs

Will interest rates go up in Australia?

Analysts at Oxford Economics, ANZ Research and Westpac IQ suggested the RBA could hike rates by 50 bps in September 2022. Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never trade or invest money that you cannot afford to lose.

When will Australian interest rates rise?

Analysts at Oxford Economics, ANZ Research and Westpac IQ suggested the RBA could hike rates by 50 bps in September 2022. Westpac IQ added that four 25 bps rate hikes may be required for the RBA to meet its inflation target goals. Note that analysts’ predictions can be wrong.

How high will interest rates go in Australia?

The RBA has said that it is not on a “pre-set path” in its “process of normalising monetary conditions over the months ahead”. Economic data will be key and will guide the central bank in its decision on the size and timing of future rate hikes.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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