Rates to increase then drop 50 basis points in 2023
Watch this short snack-sized video or read below for the detailed version of this month’s update.
Variable interest rates are almost certainly increasing in February next month off the back of the most recent inflation data released this week. Economists believe we’re close to the end of this rate hiking cycle though, with one more increase to come in March, before a long pause. If rate rises do pause and later in the year show glimpses of falling next, with the resumption of migration and a tight job market, demand for housing should naturally increase again and cities such as Sydney could be the first to react positively. The current cost of living situation, with higher rates, isn’t ideal for anyone, especially if you’re coming off a low fixed rate, but at least the future doesn’t seem as bleak anymore – there’s light at the end of the tunnel.
Rates to be cut by 50 basis points by the years end
The 2022 December quarter inflation data released by the Australian Bureau of Statistics (ABS) would have disappointed the Reserve Bank of Australia (RBA) and most Australian’s. The important number released here was the underlying basis inflation data which was 6.9 per cent, referred to as the “trimmed mean”, excluding the items which have rapid up and down swings like petrol, energy and food prices - this was expected to only be 6.5 per cent. This data suggests we will definitely see our cash rate increase from 3.10 to 3.35 per cent next month, to hopefully curb this spending and bring this data more in line with target. Many economists believe we will almost certainly see another rate rise on March 7, when the (RBA) meets again. That will be two back to back rate increases in 2023, taking our cash rate to 3.6 per cent, hurting our savings which are already trending lower.
Now that the kids are going back to school and the Australian economy starts again on Monday, will all the spending slow? Has the credit card now been put to the back of the wallet and maybe the data for the December quarter was our “last spending festive season hurrah” before the pull back? As we may already know, it takes a few months for rate hikes to impact borrowers.
It’s an even longer lag for rate rises to impact those on fixed rates as it is only felt by these borrowers when their fixed terms expire. Data suggests many fixed rates will expire this year, seeing repayments increase for these borrowers dramatically. Repayments on a very low fixed 2 per cent will increase now to a variable rate of 4.69 to 5 per cent. With household debt levels being so high (see below) we should see impacts filter through to the economy and a slow down in spending as people have less disposable income.
Our treasurer Jim Chalmers said during the week, “our hope is that inflation has now peaked”. CBA’s Head of Economics Gareth Aird believes the economy is in for a soft landing in 2023, going even further to state that, “we have one more 25 basis point rate hike in our profile in Q1 23 for a peak in the cash rate of 3.35 per cent. We forecast 50 basis point rate cuts in late 2023”.
Housing market to fall a little more before rising again at the end of the year
So with the end of rate rises in sight, it’s likely that buyers will start to feel a little more confident once more economists and the data, support a rate pause. Until such time though in 2023, we are likely to see further falls in housing demand and values in the months ahead. With initiatives available for first home buyers, and once these interest rates stabilise, we expect demand to pick up and a gradual improvement or a stablisation in housing prices.
Final thoughts
With one or more rate hikes to go (hopefully), we’re likely to see a softer property market with fewer properties going to auction as vendors and buyers look to see if this inflationary dust settles. If inflation slows down as expected, the RBA will then pause on the rate hikes and housing outlook will ultimately knee jerk positively to this. Let’s hope there’s no more surprises and also, no more extreme weather events. The incoming data and perspective on the future ultimately dictates what the RBA will do. Our view here at Black & White Finance, especially because we see many of our very own clients coming off fixed rates now, is that RBA’s tightening cycle won’t be needed anymore as spending will ultimately slow down and the next rate movement at the end of the year, will be down, fingers crossed.
As these rates rise, it's important to ensure your lending solution is in your best interests to tackle this challenging period and that each loan application is with the lender who’s conditions meet your specific requirements. We've worked very hard to create long-lasting, fostered relationships with all the 30 plus lenders on our panel, to ensure all our borrowers here at Black & White Finance are on the best terms available. Our finance strategies now more so than ever, need to be smart and in our best interests, to tackle this inflationary economic landscape.
If you want to know more about the different rates, terms, or bank specials on offer at the moment or just have a general question, please send a note to peter@blackandwhitefinance.com.au or click the start today button a little lower. With the help of our amazing Mortgage Broker Sydney – Black and White Finance team, we will be able to support you.
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