Why interest rates won’t hit 3.5% and Australia won’t go into recession

With the Reserve Bank of Australia lifting interest rates for the third month in a row, the conditions are changing for Australians who are looking to take out a home loan or are currently paying one-off.

This July, the RBA lifted the cash rate by 50 basis points, doubling it from last month’s 0.85% to 1.35%.

We expect that this won’t be the end of it either, but that in September and again before the end of the year we will see cash rates rise to 2% (or higher).

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.

By putting interest rates up, the RBA is working to curb inflation.

The Melbourne Institute's monthly headline inflation gauge rose by 0.3% in June after rising 1.1% in May, while the annual rate fell from 4.8% to 4.7%.

Here at Intuitive Finance, we’re hopeful that this is a reliable indicator; we all want to see inflation slow down.

However, there are also several variable factors to be aware of outside of interest rates that may influence inflationary pressure, both up and down.

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 in 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% from a year ago)
• A drop in consumer confidence resulted 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.

While there are many predictions that the cash rate will rise to 3.5%, it’s important to contextualise this in the framework of our current economy.

The last time we saw an interest rate increase at this height was in 2012, so we believe it’s too early to make these kinds of estimations.

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

When there is a decline in economic activity (typically spending), it is classified as a recession.

Some key factors experts use to measure if a nation is in a recession are unemployment levels, the retail environment, the GDP level, and more.

The AFR recently surveyed 32 economists for their thoughts, and all economists surveyed said they do not see us going into a recession in either a one or two-year timeframe.

This leads us to believe that the RBA’s recent adjustments are an attempt to “scare” us to bring down inflation.

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.

The most financially sensible move for you will be dependent on your current situation, including your savings, debts, assets, and more.

For many borrowers, refinancing an existing loan with a lower interest rate may be the most suitable option, leaving you with more funds in the short term.

However, your particular circumstances should always be discussed with a professional broker in order to ensure you can make informed decisions.

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.