The Reserve Bank of Australia met for its final meeting of the year today to set its monetary policy for the coming period. Once again, as expected, the decision was passed to increase the official cash rate (OCR) for the eighth straight meeting. This time, it was just a 25 basis point jump, but for a year that was originally predicted by the RBA to maintain its low rates, it puts the total at 300 basis points worth of increases up to 3.10%.
It’s also the highest the cash rate has been since November 2012, but around the world, there are many examples of tight monetary policy in the midst of high inflation. The Federal Reserve is already sitting at 4.00%, the Bank of Canada is at 3.75% with forecasts for another 50 basis points move tomorrow. The European Central Bank and the Bank of England are lagging behind, but gaining, at 2.00% and 3.00% respectively, but have more to consider with respect to the energy crisis affecting their economies.
The AUD/USD Barely Reacted to the RBA’s Monetary Decision on Interest Rates
The AUD barely reacted to the RBA monetary policy decision during the Asian and European trading sessions, only up 0.43% against the USD at the time of writing.
The AUD/USD pair is currently sitting below the 0.382 Fibonacci retracement of the bearish movement that occurred between April 5th 2022 (around 0.7576 closing price of the peak of the year) and mid-October 2022 (lowest level of the year at around 0.6200). The Relative Strength Index (RSI) is slightly above its neutral level of 50, but exhibits no clear direction.
The ActivTrades market sentiment indicator shows that its community of traders isn’t too sure about what the next move of the currency pair will be, as 51% of all traders are buyers and 49% are sellers. Next week’s Fed meeting might provide a clearer indication of the trajectory of the currency pair.
The Christmas Gift No-one Wanted
According to Ratecity, homeowners with a $500,000 mortgage and 25 years left to go on their loan, at the average owner-occupier variable rate of 2.86% in April, may see their monthly payments rise by $834 as a result of this year’s interest rate increases.
The statement spoke of the “lag” with how monetary policy operates, touching on the fact that many would-be yet to feel the full effects of the increases due to the fixed portions of their loans. Something of a “mortgage cliff” is imminent though, according to a recent article in The Guardian, with at least $270 billion of home debt leaving the record low fixed interest rates that were snapped up during the pandemic.
Having said that, the stats are not all bad. According to data from the Commonwealth Bank, 78% of homeowners who took out a loan are ahead on their payments and 1 in 3 customers are two years ahead.
The problem is that there is also 26% who are less than three months ahead – a cushion that may be swiftly lost with rates increasing. There is now $64 billion in offset accounts belonging to CBA mortgage borrowers, an increase of $19 billion over the balances prior to the COVID-19 outbreak.
The Key Drivers of Rate Rises
Despite having dipped slightly at the end of November to 6.9% from 7.4% the previous month, Australia’s annual CPI is expected by the RBA to hit 8% at the close of the year and then start to decline from there. It’s not until 2024 that the central bank expects inflation to get down to around the 3% mark, which is still above their 2% mandate. Given the forecasts, it’s difficult to see how the recent course of the Australian cash rate will shift much in the near future.
Governor Lowe’s statement indicated that the Australian economy was showing no signs of slowing down. As the global economy weakens, the rebound in spending on services levels off, and household consumption growth slows owing to tighter financial circumstances. The bank predicts modest economic growth for the next year, and in 2023 and 2024, growth of around 1.5% is expected.
In spite of recent improvements, the labor market is still very competitive. For the first time since 1974, October saw a decrease in the unemployment rate, which hit 3.4%. Both the number of open positions and the number of advertisements for such positions are quite high, but somewhat decreasing.
What Should Investors Expect From Now?
The RBA board forecasts that there will be further rate hikes in the months ahead, but the committee is not following a predetermined path. Many will breathe a sigh of relief that the next meeting, barring unforeseen circumstances, is not due until the 7th of February next year.
In the meantime, the central bank will be keeping a careful eye on the state of the international economy, as well as consumer spending, wage trends, and price formation in the country.
Before today’s decision on the interest rate, the comparison website Finder polled 40 industry professionals and economists, and 83% of those respondents indicated they anticipated that the cash rate would reach its highest point somewhere in the range of 3.25 percent to 4%.
When asked about when the rates would reach their highest point, 85% of those who took part in the study said that it would happen within the next year, with March (17%) and June (17%) emerging as the months in which it was most likely to take place.
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