Real Estate Investment:Today

RBA rate rises a slippery slope to downturn

The RBA has followed up its shock May official rate rise – the first in over a decade, with another increase over June – but this time by an extraordinary, near-record 0.5%.

June’s rate increase is the highest since the same result recorded in February 2000 and the second-highest on record behind only the 0.75% increase recorded over August 1994 – 28 years ago.

The RBA has clearly decided to go early and go hard with rate rises in an attempt to control the highest inflation in decades.

Why is there another increase?

The policy aim for sharply higher rates is to reduce demand in the economy and dampen inflation, however, the clear risk is that reduced demand will lead to higher unemployment setting the scene for a hard landing – a significant economic downturn.

In the shorter term, however, the economy is well placed to cater for higher rates with current record low unemployment, rising wages, high savings levels, government handouts, and the wealth effect from recent strong home price growth – and rates are still at near historically low levels.

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The interest rate repayment buffer set by banks for borrowers – currently 3%, will also provide an offset to the impact of higher rates on household budgets.

The question is how high do rates have to rise until inflation eases – particularly given the impact of uncontrollable outside forces notably record oil prices. Higher rates over time will diminish the current offsets resulting in harder times for households.

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