Far from the top. Over the past few months, we’ve seen sharp increases in the RBA cash rate target. On August 2, the RBA – as expected – increased the cash target rate to 1.85%. While we would like to say this is the top, the reality is we’re far from it. Market consensus expectations are for the target rate to increase to 3.35% during 2023, which will result in home loan interest rates of 4.98%.

Cash Rates, Inflation, Wages Growth and Asset Pricing

  • At the RBA Monetary Policy Decision meeting on August 2, 2022, the RBA decided to increase the cash rate target by 50 basis points to 1.85%. This was consistent with the forecasts and commentary in the RBA’s previous meetings. Money market activity is also decreasing and the RBA has a desire to reduce its AUD investments from the current unprecedented, historical highs.
  • While debate rages about the cause of the latest inflation figure of 6.1%, without federal and state authorities reducing infrastructure and social spending or changes in global trade, the only tool available to the RBA to reduce inflation to the target 2-3% is quantitative tightening.

Exhibit 1: GDP, Inflation and RBA Cash Rate

Exhibit 2: Wage Growth and Unemployment

Exhibit 3: Annual House Price Movements

Funding Costs

The RBA injected a huge amount of capital, around $465 billion, into the local economy during the peak of the COVID pandemic. This – alongside huge social support and infrastructure spending by the state and federal governments, and disruption in global logistics – has been the main driver of inflation, which has reached its highest rate since the early 1990’s. With effective full employment and inflation not under control, the RBA is doing what it should be doing – restoring normal monetary policy. Unfortunately for debt consumers, this means much higher funding costs compared to the ultracheap rates that we have seen over the past five years.

Exhibit 4: Reserve Bank of Australia Assets

Exhibit 5: Australian Government Bond Yield

Exhibit 6: Household Income and Consumption

Exhibit 7: Housing Loan Commitments