Is the interest rate medicine working?

By Graeme Salt

Interest rates up?  Interest rates down?  Wherever mortgage holders look, they seem to get inconsistent opinions on whether we are looking at more rate rises, of if we are at the top of this rate-rise cycle.

It’s probably looking at the facts that we all agree on and then look at the various opinions where there are disagreements.

Fact 1:  over the past two years, Australians have suffered 13 interest rate rises.

Fact 2: these rate rises have had a huge impact on inflation which has reduced from 7.8 per cent in December 2022 to 3.6 per cent in March 2024.

But that’s as far as the agreement goes – thereafter, there are diverse opinions as to whether rate rise have inflation under control or if there’s more to come.

And this month’s budget has clouded the waters.  One economist has a rule of thumb that for every $7 billion in extra spending, one interest rate hike of 0.25 per cent is required to offset its impact on inflation.  This budget has $17.7bn more – ie more than two rate rises.

But Treasury is forecasting inflation to reduce to 2.75 per cent by June next year, which may lead to rate cuts in 2025.

Wherever we look, we see conflicting information on the future for mortgage rates.  Below are some snippets from the news that show that nobody can predict interest rates with any certainty.

Next Rate Down	Next Rate Up
US inflation cooled to 3.4%	RBA expects inflation to increase to 3.8%
Australian unemployment increased to 4.1%	Wages forecast to grow at 4%
Job adverts DOWN 4.7%	RBA considered a rate rise in May
Telstra announced 2,800 job cuts	RBNZ delayed rate cuts due to inflation

Thankfully no economists are expecting another 13 rate rises.  But some think there’s a couple that could still be necessary.  Others expect the next rate rise to be down – but not till next year.

Early this year, the markets were predicting rate cuts by August 2024 – but these have been deferred given that inflation is not dead-and-buried.

So, what’s my gut reaction?

It’s likely that rates will start coming down next year.  Globally some Central Banks have started reducing rates or have telegraphed the fact that they will do.

But, given that the average Australian mortgage is for 30 years, does it really matter?  The Australian economy has weathered the interest rate storm very well.  It can cope with a few more months of headwinds before rate cuts bring tail winds behind us.

Graeme Salt is an award-winning mortgage broker who meets the home loan needs of clients throughout Australia.  For a no-obligations consultation on your mortgage needs, please contact him on 02 9922 5055