Are we looking at another rate rise?

By Graeme Salt

The same day that the Reserve Bank said interest rates were likely to cool the economy, new inflation figures came out way higher than economists predicted.

Many now believe that we are looking at rate rises in August.

Today, Reserve Bank (RBA) Assistant Governor, Christopher Kent, gave a speech entitled Restrictive Financial Conditions in Australia; broadly speaking, it argued that rates were sufficiently high to keep a lid on inflation.

Only hours later, the Australian Bureau of Statistics produced inflation data showing prices have edged up to 4 per cent.  Most economists were only predicting inflation of 3.8 per cent.

If inflation proves to be persistently high, the RBA will have no choice but to raise interest rates.

Yet, in today’s speech, Dr Kent noted that the effects of tighter monetary policy are felt most directly by the roughly 40 per cent of households with a mortgage and that highly-leveraged borrowers are selling out of property as rising mortgage rates stretch budgets.

Loan discharges are now outstripping new loans at a rate of 2:1, implying that Australians are choosing to get out of debt where they can.

Dr Kent said the RBA’s 4.25 per cent rate rises meant monetary policy was “restrictive” and households were feeling a “painful squeeze”.

After 13 interest rate rises, the average outstanding mortgage rate is now a little over 6 per cent, and total scheduled mortgage repayments are now consuming a record 10 per cent of household disposable income.

The 4.35 per cent cash rate is above the central bank’s estimate of the neutral interest rate (the rate which is neither too high, nor too low for the economy).  Some economists believe the cash rate is one percentage point above the neutral rate.

Certainly rates are likely to stay higher for longer than previously anticipated – and there is the risk we are facing another rate rise in August.

The good news is that, for the right borrower, some lenders are offering sharp loans.  If you want to discuss which lenders are offering what at the moment, please contact me.

Graeme Salt is an award-winning mortgage broker.  For a no-obligations consultation on your lending needs, please contact him on 02 9922 5055