Issue 23 | Thursday 16 November 2023 | Unpacking the Melbourne Cup Rate Hike and Global Comparisons
Hello there, Andrew Bell here.
Well, after a peaceful five months without any interest rate changes, the recent Melbourne Cup rate hike has stirred up a lot of speculation about where interest rates are headed and what it means for our economy, cost of living, and the real estate market.
This rate increase was simply a response to stronger-than-expected inflation figures. Inflation is still sitting comfortably above the Reserve Bank’s targeted 2-3% range. The main culprits behind this are housing costs (rent and construction), electricity, and fuel. Fuel prices, in particular, have been driven up due to production restrictions by Russia and Saudi Arabia, along with the global response to the Israel/Palestine conflict.
What interest rates can control is already starting to show. International travel is decreasing, food prices are dropping, and there’s a slowdown in furniture purchases and construction costs. Monetary policy has effectively managed the areas it can control.
But, of course, we can’t sustain high inflation, and using monetary policy is the most direct way to slow down the economy. Unfortunately, the real issue nobody wants to discuss is that unemployment remains low, and many industries are struggling to find staff, creating significant cost pressures throughout the economy. The unemployment level is a significant factor to watch now, with employment ads hitting a 2-year low, hinting at a potential rise in job cuts as businesses, impacted by high interest rates, scale down. Job ads have fallen by 11.2% since their peak in September 2022. None of us want to see job losses, but it’s an inevitable byproduct of this stage in the economic cycle where higher interest rates are introduced to curb inflation.
The recent rate rise on Cup Day has drawn criticism for positioning the Reserve Bank behind the curve, and it’s likely that more interest rate rises are on the table. Comparatively, the United States Federal Reserve and the European Central Bank are already priced in for a 2.5% interest rate cut by June 2024. Market expectations also point to the Bank of Canada delivering a 2.5% cut by July, followed by the Bank of England in August and the Reserve Bank in New Zealand in October.
AMP Chief Economist Shane Olliver noted that our Reserve Bank, due to high household debt, has been more cautious compared to other Central Banks, contributing to the current disparity in rate expectations. As I mentioned earlier this year, our Reserve Bank was slower to start raising rates compared to its global peers, prompting a more assertive approach to catch up. Our first interest rate rise was in May last year, seven months after the Reserve Bank of New Zealand, five months later than the Bank of England, and two months after the United States Federal Reserve. I just wish they could learn from past mistakes.
On a positive note, Westpac CEO Peter King has stated that borrowers are prepared to handle more interest rate tightening amid persistently high inflation. He believes borrowers can withstand several rate rises, acknowledging that it won’t be painless and will likely impact consumer spending and businesses to some extent. However, he expresses confidence in the resilience of mortgage customers to date.
Certainly, these are interesting times. The message for all of us is to adjust our budgets and be prepared for potentially another 12 months of higher rates before we start to see a downward cycle. We’ll need to keep an eye on the stubborn external factors outside the Reserve Bank’s control and see how they play out in the months ahead.
And now, for the important announcement – we are now open for bookings for The Event 2024. This event, described as the most iconic real estate promotion in the country, marks the opening of the annual real estate calendar every year and is trademarked as unique to the Ray White Surfers Paradise Group. It’s a fantastic promotion showcasing a wide selection of Gold Coast properties. For 2024, the selection includes a special segment of very affordable properties for first home buyers, individuals on low incomes, and investors, all the way to some of the Gold Coast’s best prestige properties, along with an excellent array of commercial properties.
My brother Greg and I take pride in being the creators of this concept, and over the years, it has produced amazing results for those who participate in The Event. I extend an invitation to all to be a part of The Event in 2024, but please reach out to us as there is a limited number of properties that can participate, and our bookings fill up very quickly.
Details on how to contact us are on the screen now.
I hope you had a winning Melbourne Cup and are looking forward to a festive end to the year.
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group