It came as little surprise to anyone that the Reserve Bank of Australia (RBA) decided to lift interest rates by 25 basis points today, taking our official interest rate to 0.35%. Given the March quarter CPI surge in headline inflation of 5.1% the economy had reached a point where the Reserve Bank felt it simply couldn’t hold off any longer. As usual when it comes to conversation around interest rates, there’s been a lot of speculation about what this means for the property market and even the wider economy in general and I think this is where perspective becomes very important.

If you recall, the RBA decided to cut interest rates to their historically low standards in a bid to offset the potential ravages that Covid would have on the Australian economy. Additionally, they embarked on a course of quantative easing and suppressed bond rates (yields) to keep the cost of credit down, in tandem with the government pumping a lot of cash stimulus into the economy in an effort to boost spending and ultimately demand. What the RBA couldn’t predict was how quickly demand would actually pick up in such an environment, particularly as Covid restrictions were eased.

Since the CPI headline inflation figures include food and energy prices, which are traditionally very volatile and can be influenced by random events, the RBA focuses more on the results of the core or “underlying” inflation figures which exclude these. Think the recent floods affecting the cost of fruit and vegetables and of course the War in Ukraine effecting fuel prices for instance. By excluding these the RBA get a better indication of how the core or underlying aspects of the economy are performing. The core inflation figures for the March quarter came in between 3.7 to 3.2 per cent (that’s the trimmed mean and weighted medium to be precise) which as you may know is still above the RBA’s comfort level of maintaining inflation within a 2 – 3 per cent band.

Whilst demand in an economy is good there comes a point where it becomes problematic to the health of the economy. If prices for goods and services start rising sharply, then naturally workers will want to earn more in order to afford the increased cost of living. Presently, unemployment is at 4 per cent and officially at its lowest since August 2008. With unemployment now being so low there’s a strong chance that wages growth will follow and could also further exacerbate the cost of goods and services pushing inflation up further by employers having to meet wage demands. This potential wage - price spiral is ironic, considering wages growth has been stubbornly low for over a decade. This kind of price spiralling is precisely what the RBA aims to avoid as it is potentially very destabilising for the economy.

When we compare official interest rates Australia is still amongst the lowest in the developed world. In fact, across the ditch our New Zealand counterparts are currently sitting on an official interest rate of 1.5%, which adds additional perspective. Part of the challenge moving forward is how to balance competing interests. The RBA governor would no doubt have at the back of his mind that he had declared interest rates weren’t likely to budge until 2024. Though in his defense, its no easy task trying to insulate an economy from the unknowns of Covid and trying to forecast how it would play out. But such declarations would have stoked buyer confidence amongst those who took on a mortgage over the course of the pandemic.

The property market has been a strong beneficiary over the course of the pandemic enjoying tremendous growth and soaring to almost 27 per cent by December 2021. Against this backdrop today’s interest rate rise seems very modest indeed as the RBA seeks to track a course towards finding some sort of normalcy. So sure, interest rates went up today. But really, considering how our rates now compare globally, could we have expected anything else?

* This information is general in nature and not intended to be financial advice. 

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