Global Institute of Trading

In Australia the RBA is set to raise rates, will this cause a ripple effect?

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Australia's economy

Housing prices increased by 27.5%

Rent has increased by 35%

Fuel increased by 30%

Energy increased by 54%

Interest rates are set to rise by 2.5%

While wages increased by only 2.7%

How could this affect the AUD

Before covid, you could buy a 4-bedroom home in the beautiful Gold Coast for around $600,000 with repayments of around $370 per week while the average income per capita was around $60,000 p/hear. Now, that $600,000 home is going for around $950,000 due to simply no other reason other than supply and demand. Yes, people are stupid enough to pay almost double then what something is worth just to have it.

While we have a total of 149% increase in living expenses, household income per capita only rose by 2.7% which is an increase of only $1,620 p/year.

But this isn’t the tipping point, the biggest problem is all those people that got overly excited about a 0.25% interest rate that got home loans they simply won’t be able to afford once the interest rates rise to 2.5% meaning most peoples repayments will increase by around $1,200 p/month ($300) per week, $15,600 per year and that JUST for their homes. When you take into consideration the car repayments, household bills, groceries, all the babies that popped out during lockdowns… Well, you can be assured that a $60,000 per capita income isn’t going to hold up to well in the long run.

The default rate on banks will increase, housing will drop due to people wanting to get out of their loans, and hopefully, things will slowly go back to pre-covid levels. (hopefully)

While we’re on the subject of home loan repayments, rent has also increased by 35% meaning if you were paying $650 a week pre-covid (reasonable) you’re now paying $875. Just thought I’d throw that in there.

Can the RBA stay creditable?

Australia’s inflation data has put the RBA in a difficult place, its key measure of underlying inflation, the trimmed mean, is running at 3.7% YoY and well above its 2.3% target range and the unemployment rate is at a series low of 4%. Yet, the central bank’s cash rate remains at a record low of 0.10%. So, the RBA needs to raise rates this week but is faced with a federal election on 21st May.

The last time the RBA raised rates during an election campaign was in 2007 and the governor at the time, Glenn Stevens, received a lot of criticism from political pundits and members of the Liberal Party. The incumbent Liberal-National Party coalition government campaigning on low borrowing costs went on to lose the election. No governor has raised rates during an election since.

A hike could give the currency a small boost, but given the concerns about China’s growth and the Fed outstripping the RBA in terms of rate hikes, it would be an opportunity to sell the AUD. The RBA’s rhetoric may also not match the market’s aggressive market pricing following rate hikes. Governor Philip Lowe will reassure the public the RBA will be mindful of the stresses households are facing with the rising cost of living and mortgage payments when raising rates.  

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