The era of low interest rates is over, with the Reserve Bank of Australia announcing a 0.25% interest rate increase to take the official rates to 0.35% on Tuesday 3 May.
Yesterday the US Federal Reserve increased their interest rates by 0.5% and Reserve Bank of India by 0.4% to 4.4%.
In Australia, the timing of this interest hike has played into the political debate about economic management, currently raging in Australia. The last time interest rates were increased in the middle of an election campaign was in 2007, when the battle was between John Howard and Kevin Rudd. Another 16 days (unless there is a hung Parliament) will tell if the history of interest rate increases at election times, repeats itself.
The Reserve Bank, which had commented last year that it saw no reason for any interest rate hikes prior to 2024, was pushed into this corner thanks to rising inflation numbers.
With a mandate to keep inflation in the 2-3% band, recent data had inflation just over 5%. Caused by rising fuel prices, the Russia-Ukraine war, global supply chain challenges, low supply of labour and other factors, the Reserve Bank has decided to move early in its monetary policy and follow other global central banks in taking the official interest rates north. Analysts believe that this will be one of many this calendar year.
While good news for those with monies in their bank accounts, those with high mortgages will need to plan for rising interest costs on their repayments. Property prices are also predicted to fall 10-15% by early 2024.
Australia’s economic growth is tipped to be about 4% this year but can fall to 2.5% next year. There will be pressure on passive bond funds as interest rates increase. Property yields will also come off though overall Australian equity markets, and companies with low debt will be in a good place. Fuelled by a commodities boom and post COVID community exuberance, well-managed businesses will take advantage of emerging opportunities. One just has to look back at the last 24 hours – such as the Qantas announcement of procuring new Airbuses to satisfy the travel demands of passengers wanting to get back to their traditional holidays in London and New York.
It is not all gloom and doom.
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