Why it's a good bet the RBA's Melbourne Cup Day interest rate hike will be the last
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Tuesday, November 7, 2023
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At its meeting last week, the US Federal Reserve kept its official interest rate on hold.
Key Points:
- At its meeting last week, the US Federal Reserve kept its official interest rate on hold.
- Reserve Bank Governor Michele Bullock’s statement accompanying Tuesday’s hike in Australia’s cash rate makes it look as if we’re about to join that club.
- It makes it look as if this hike from 4.1% to 4.35% – a 12-year high – will be the last.
The RBA has taken our insurance
- The statement makes it look as if it wanted to take out insurance.
- While the bank still expects inflation to continue to fall, it says progress now looks “slower than earlier expected”.
- It isn’t that it thinks inflation won’t keep coming down; it’s that it wants to be sure it is.
Australian hikes hit harder than in the US
- The US, the UK, the EU, Canada and New Zealand all have higher official rates than Australia.
- Here’s why: almost all US home borrowers are on fixed rates, meaning their required mortgage payments don’t increase.
- And US fixed rates are nothing like Australian fixed rates.
- The typical term in the US is 30 years, rather than the two to three years common in Australia.
- This means that, as long as borrowers in the US don’t refinance or move homes, their payments are fixed for the entire term of their loans.
- After a year of less-high Australian rates, Australian consumers are buying 1.7% less.
‘Painful squeeze’
- She also noted others were benefiting from rising housing prices, substantial savings buffers and higher interest income.
- Bank calculations suggest one in 20 variable-rate borrowers are now going backwards – paying more for essential expenses and housing than they earn.
A frugal Christmas, before possible rate drops in 2024
- It is also looking like prices scarcely increased at all last month.
- The Melbourne Institute inflation gauge, which comes out ahead of the Bureau of Statistics gauge and broadly tracks it, fell 0.1% in October.
- It’s pointing to a frugal Christmas in which retailers are going to have to discount if they want to move goods, taking further pressure off inflation.
- Read more:
Petrol is holding up inflation – the 7 graphs that show what's happening to prices and what it will mean for interest rates
Peter Martin is Economics Editor of The Conversation.