Why the interest rate increase won’t hit 3.5% and Australia won’t go into recession

The interest rate increase in May was the first since 2010, and the June (and now July) raise of 50 basis points marks the largest increase since early 2002.

Other factors, both global and domestic, that can increase inflation include:

• Wars and civil unrest around the world, for instance, the war in Ukraine
• Increase in petrol, power, and food prices
• Local weather disasters and events such as floods
• Falling house prices and a drop in Australians’ ‘wealth effect’
• Uncertainty in the construction industry (many builders going into liquidation)
• Lingering pandemic issues, particularly in China

Factors that can decrease inflation include:

• A slowdown of sales, particularly in the new car market (the Federal Chamber of Automotive Industries reported that new vehicle sales totalled 99,974 units in June, down 9.7% on a year ago)
• A drop in consumer confidence resulting in less spending (a recent report by ANZ and Roy Morgan indicated that consumer confidence fell 1.2% in the past week)

All of these factors can influence inflation, and the RBA adjusts the cash rate based on these.

Overall, what underpins the RBA’s logic for these decisions is how interest rates can influence spending; if higher, people are less likely to spend their money. If lower, they are more likely to spend their money.

When interest rates are made higher by the RBA, commercial banks then need to pay more, meaning these higher rates are often passed to customers. It’s great if you’re looking to accumulate interest on your savings, but if you’re looking at taking out a loan, it becomes markedly more expensive.

If higher interest rates result in lower spending, it means there is a lesser demand and stronger supply. This means that the price of goods ends up dropping in order to entice consumers, thereby lowering inflation.

Intuitive Finance does believe, however, that we will see another increase in September that will bring the cash rate to 2%.

At Intuitive Finance, we do not think that we will go into a recession. Business leaders are reporting strong markets, showing that customers are coping with the financial pressure. The RBA’s increase of the cash rate as a way to curb inflation is something that we do support, however, we believe that they need to be cautious not to go too far with the hard interest rate therapy or the attitudes of consumers and business leaders could change for the negative.

Here at Intuitive Finance, as industry-leading brokers we can work with you in a number of ways – for instance, we can restructure your loan or help you with a rate review. A rate review involves us reaching out to your lender on your behalf to ensure you still have a competitive rate, or even ask for a lower one. Changing your home loan structure can be done in a number of ways with us as well; you may want to consolidate debt, access equity, open an offset account to save on interest, or fix your rate to avoid falling victim to fluctuating repayments.

Overall, we can provide you with award-winning financial home loan guidance and guide you through the homebuying process with our expertise. This time of rising interest rates doesn’t have to be intimidating; with the right advice, you can navigate this economic period with confidence.