RBA 0.5% Rate Rise Seen As Necessary Step In Normalizing Rates

Industry News

& Articles

RBA 0.5% Rate Rise Seen As Necessary Step In Normalizing Rates


The rate rise we had to have………………

Yesterday’s half of one percent rise in official interest rates is a further necessary step in the withdrawal of the extraordinary monetary policy support that was put in place by the Reserve Bank (RBA) to assist the Australian economy through the pandemic. The official cash rate now sits at 0.85 percent. The 0.5 percent increase is the largest official rate rise in nearly 22 years.

Record low interest rates are not consistent with developments occurring throughout the world at present, according to the RBA. High domestic energy and food prices following the war on Ukraine, supply chain and production disruption related to the spread of COVID in China and high core inflation in other economies, forced the RBA’s hand. The RBA noted that inflation has picked up faster and to a higher level than previously expected. According to the RBA, inflation sources are broadening. Firms are increasingly passing on cost increases arising from supply chain pressures at a time when consumer demand remains strong, while higher living and new dwelling costs are pushing up prices.

On this basis, a half a percent rate rise is warranted at this time. The bond market was telling us we had an inflation problem well before it showed up in government data and before Governor Phillip Lowe acknowledged that inflation was building around the world and in the Australian economy. Governor Lowe’s statement yesterday acknowledged this point when he said that the inflation outlook is materially higher than envisaged three months ago.  The RBA was previously behind the interest rate curve and the magnitude of yesterday’s half a percent rate increase suggests that the RBA is in catch-up mode to achieve a rate setting today that should have been in place months ago. Hindsight is a wonderful advantage; however, the RBA is doing what is necessary, and that includes changing its outlook when the facts change, which is what has occurred this week, at the RBA.

Part of this problem can be explained by the fact that Australia is only one of two OECD nations that compile its consumer price index data quarterly, rather than monthly. The other nation is New Zealand. This means that when the consumer price index data is published, many of the measures that comprise the data are months old and won’t be updated again for another 3 months.

What is the impact?

The impact of rising interest rates on homeowners with a mortgage is significant. A 50 basis points rise on a $500,00 mortgage adds about $120 per month to home loan repayments. Successive interest rate increases over the coming 12-months could increase this repayment amount by $600 - $800 per month, for a homeowner with a $500,000 mortgage.

For first-time homeowners, the impact of higher mortgage rates is especially severe. A new mortgage to buy an entry-level home in Australia’s most populated state of NSW is now around $700,000. New homeowners could be paying about $800 a month in additional loan repayments a year from now, based on current market expectations of where official interest rates may settle.

This impost is likely to place a dampener on new housing demand in Australia. The impact of less housing demand on the Australian economy is potentially significant. This reason is because housing demand IS the business cycle in Australia, given its higher multiplier effect compared to other economic activity such as mining and manufacturing. Housing is also labour intensive, and a slowing of house construction activity tends to reduce employment levels.

Looking ahead. The RBA now expects headline inflation to peak at around six percent in the second half of this year and to return to the top of the two to three percent target range in 2024. The RBA expects the Australian economy to expand by four and a quarter percent over 2022, and moderate to a two percent growth rate over 2023.

Nowhere in these forecasts is a mention of economic recession.

While the RBA’s tightening monetary policy stance has only begun, the RBA appears to have a clear line of sight over inflation and the strength of the Australian economy, over the next two years.

Governor Lowe reiterated yesterday that the RBA Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. He went on to say that this will require a further lift in interest rates over the period ahead.

Rational investors know that the war on Ukraine will end, supply chain disruption can be managed, and nothing cures high prices faster than high prices.

Markets appear accepting of the monetary policy approach currently adopted by the RBA Board, who now have a closer handle on the inflation outlook and confidence that a resilient Australian economy has the capacity to weather the issues currently confronting the world.

Louis Mosmann

Louis Mosmann is a Private Wealth Client and Research Assistant at KOSEC- Kodari Securities. Louis covers macroeconomic events, global markets and ASX300 company announcements, allowing clients to make more informed investment decisions. Email Louis at l.mosmann@kosec.com.au.

Comment on this company

Latest Stories

Sandfire Announces 147Mt Mineral Resource Estimate For MATSA Mine Project

Sandfire today released an update of the Measured, Indicated and……

Piedmonts North American Lithium Mine To Restart In First Quarter Of 2023

Piedmont has confirmed the restart of spodumene (lithium) concentrate production……

Collins Foods KFC Brand Strength Boosts FY22 Sales, Profits and Dividends

The financial year ended 1 May 2022 saw Group revenue increase by……

More for you

EVN Down On Wet Weather Impacts And COVID Related Staff Absenteeism

COVID related staff absenteeism and wet weather has……

APA Group To Pay 28c Final Distribution For 6mths Ending June 2022

APA has announced a final distribution of 28 cents per stapled……

Arena REIT To Pay 4.05 Cents Quarterly Distribution On August 4

Arena REIT (Arena or ARF) is an internally managed stapled real estate Group……

Iluka To De-Merge Mineral Sands Assets To Focus On Rare Earths Operations

Iluka is set to become an Australian-based critical minerals company……

US Federal Reserve 0.75% Rate Rise Is The Largest Increase Since 1994

In a decisive move that was well received by markets around the globe……

RIO’s New $4.3B Gudai-Darri Mine Delivers First Iron Ore Shipment

RIO’s first greenfield mine site in the Pilbara in 10 years has delivered……

KOSEC Terms & Conditions

Kodari Securities Pty Ltd (CAR 399556) trading as KOSEC is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC is a financial services company and any information provided by its platforms, portals, reports and documents is protected by copyright. Any unauthorised production of this information is prohibited.
KOSEC reserves the right to change or remove any information provided on our website, reports or any documents including these terms and conditions at any time without notice. The change or modification to the terms and conditions will be effective immediately upon posting an updated version on our website, necessary platforms and documents. It is recommended that you review the information provided on our website, including these terms and conditions frequently for any changes.

KOSEC provides general advice only. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. KOSEC recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Please make sure you read our Financial Services Guide (FSG).

KOSEC does not guarantee any returns. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). Investing in the stock market can incur huge losses. Please also be aware that fees will incur on every transaction regardless of the performance of your investments or returns generated. Employees and or associates of KOSEC may hold one or more of the stocks, securities or investments reviewed by the company.

Your use of information from our website, reports, documents and from talking to our representatives/associates is at your risk. Under no circumstance should the investment be based solely on KOSEC information and general advice. You should seek professional financial planning advice.
KOSEC aims to maintain the accuracy of the data and information provided on this website, by using information prepared from a wide variety of sources, which KOSEC to the best of its knowledge and belief, considers accurate and does not make any representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.

We may at times refer to third parties, which the details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. KOSEC has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

As a client you will be charged a yearly service fee and a set brokerage fee per transaction. Your service fee will automatically renew at the end of your agreed 12 month period at the same rate advertised at the time. Your credit card or bank account will be charged for a further year following which will again auto renew until you cancel your yearly service fee. You can cancel the auto renewal at any time in advance of the renewal date by contacting us. KOSEC is aware of the need to ensure the security of your credit card details and our payment systems are compliant with the Payment Card Industry (PCI) Data Security Standard.

You consent to receiving email correspondence from KOSEC, as well as companies KOSEC has an association with. These emails will be sent by KOSEC and third party companies. You can opt out of receiving any category of emails at any time by contacting us. We may from time to time inform you of special offers, or even ask your opinion of the services we provide, but your involvement is optional. Should you request us to do so, we will archive your details.

Indemnity and Liability
You indemnify KOSEC from all claims or threatened claims, suits, demands, damages, costs as well as including legal costs incurred in dealing with any threatened claim, expenses made by any person or corporation against KOSEC and any other amounts which is caused by KOSEC providing information, execution and General Advice.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from a decision made by you on the basis of information obtained through the use of our portal, reports, documents or any General Advice given and any transaction taken place.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from delays in executing orders for the client and acknowledges KOSEC makes no guarantees about the time taken to execute an order on behalf of the client. You acknowledge that KOSEC relies on third parties in providing technology and release KOSEC from any harm, loss or damage you may suffer as a result of the failure of such information technology.

Cookies and Links
KOSEC website, and its portal uses cookies, which lets us identify your browser while you are using the site or our portal. Cookies do not identify you personally. They simply allow us to track your usage patterns. If you prefer not to receive cookies, you can configure your browser to reject them or to notify you when they are being used. The functionality of the KOSEC website may be impacted if you restrict the use of cookies.

Fill up the form below and we will get back to you as soon as possible.



KOSEC’s CEO, Michael Kodari’s new book, “Stock Market Success” valued at $39.95, available at Dymocks book stores with all the proceeds going to Dymocks Children’s Charities.


Latest TV Commercial