RBA expected to raise cash rate by 50 bps in July and August – where and when will the cash rate settle and what are the implications for property prices?

The predictions on the RBA’s decision to increase the cash rate are now firming at 50 bps for the
July 2022 meeting and we are now seeing adjusted expectations for August also at 50 bps.

It is also expected the increase will be immediately reflected in variable rates by all lenders and in
many cases by more than the cash rate increase.

Wave Money Founder & Managing Director John Flavell says, “Following the May increase we
were expecting rate rises each month somewhere between 15-25bps each step, the 50bps
increase in June has readjusted those expectations”

“The bigger question now is where and when will the cash rate settle? There are many different
views and positions with some calling 2% by the end of the year others calling 3% and some 4%
and beyond by mid-2023, added Flavell.

“The rising cost of fixed-rate funding saw significant rate hikes of more than 1% across the board
from two of the major banks last week and it is only a matter of time before the others will follow,
suggesting the market does not expect the RBA to stop increasing the cash rate at 2.50 per cent”

Not wanting to add to the conjecture Wave Money wanted to spend some time considering the
factors that will drive future moves.

In the May 2022 RBA Statement on Monetary Policy, Philip Lowe projected Australian GDP to grow
by 41⁄4 per cent over 2022 and 2 percent over 2023.

Household and business balance sheets are generally in good shape, an upswing in business
investment is underway and there is a large pipeline of construction work to be completed.

The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation
close to 5 per cent with a strong drive to curb inflation and stop the decline in consumer spending
power and increased cost of living.

Expectation is that headline and underlying inflation come down to 3% in 2024 with further
increases in interest rates.

“On inflation, the question is, what regard if any will the RBA assign to inflation drivers, said Flavell.

“Inflation at present is being driven more by supply as opposed to demand. Specifically enormous
increases in fuel prices have been driven by both international and domestic events”

“The cost of fuel as a component of the cost of almost anything we consume is driving inflation
significantly across the board - monetary policy is not likely to change fuel prices”
“Extreme weather i.e., flooding has decimated many food crops - monetary policy won’t make an
iceberg lettuce any less expensive any time soon”

“Global supply chain issues are driving the costs up on just about everything we consume, and it is
hard to see how monetary policy solves for this”

“If the RBA choses to not consider the supply side drivers of inflation, we cannot expect the cash
rate to settle until such a time as headline and underlying inflation settle at the stated target of 3%”
added Flavell.