Like in other nations worldwide, recent interest rate increases have hit many Australian borrowers hard. In moves mirroring other global central banks, the Reserve Bank of Australia (RBA) has been hiking rates to bring soaring inflation under control, which has put a lot of financial pressure on borrowers with variable rate loans as well as on businesses.
There has been further bad news as the governor of the RBA, Philip Lowe, said there will almost certainly be another rate hike in October. This will mark the RBA’s sixth consecutive rate increase, and Lowe told a House of Representatives committee that it would likely be a 25 or 50 basis points hike.
However, Lowe provided some hope to struggling borrowers by stating that the end of 0.5% increases was drawing near.
He said: “As interest rates get higher, it’s common sense that the need for big adjustments gets smaller.”
Interest rates could peak at just under 4%
According to Lowe, Australia has maintained an annual growth rate of around 3.5% due in part to increased commodity prices stemming from Russia’s war against Ukraine. However, he added that higher interest rates would seriously impact demand from households and businesses that were struggling with finances.
In recent months, rates have been increasing at their fastest since late 1994. Many investors are now predicting the cash rate will peak at just below 4% in mid-2023. However, economists from Australia’s leading banks believe that the rate will drop to between 2.85% and 3.35%.
Following the meeting between the central bank and the House of Representatives committee, several banks have amended their forecasts for the October meeting. The first bank to do this was NBA, which increased its forecast from 0.25% to 0.5% following Lowe’s comments.
In his bid to provide some reassurance, Lowe spoke not only about the end of big rate hikes but also about his confidence in Australia’s ability to deal with the current situation.
He said: “I’m more confident than many of my peers and other central banks that Australia can navigate this narrow path to bring inflation back down without [slowing] the economy too much.”
Lowe also talked about global risks, including the growth of wages in the United States, which have increased by 5-6%. In addition, he spoke about the decline in people’s real incomes and soaring inflation in most economies across Europe. He also discussed the challenges in China, Australia’s biggest trading partner, including ongoing Covid lockdowns.
Lowe said: “So if you put all that together, the outlook for the global economy next year is quite weak. And if it were to weaken further from our current forecasts, it’ll be difficult for us to navigate this path of getting inflation down while having our economy continue to grow reasonably well.”
According to Lowe, further interest rate increases would largely depend on inflation expectations and whether they remained high. He added that future RBA forecasts relating to interest rate increases were likely to be vague, especially since the central bank failed to predict the speed at which inflation would rise.