RBA hikes by 0.25%: What can we learn from other central banks?

Global central banks continue to lift interest rates as inflationary pressures hamper economies. Australia is no exception, imposing a sixth consecutive rate hike this month. But what insights can we gain from these international monetary policy decisions?

The Reserve Bank of Australia (RBA) raised the official cash rate a further 25 basis points in October in an effort to “return inflation to the 2-3 per cent range over time”, according to a statement by Governor Philip Lowe.

The RBA’s latest decision was scaled back compared to previous months. From June to September the central bank raised rates by 0.50 percentage points each meeting. This month, the Board tapered its influence in order to assess the outlook for inflation. The Australian Bureau of Statistics (ABS) will release inflation figures later this month.

How are other countries performing?

The table below shows the current interest rates and inflation rates for 15 G20 countries. The data also illustrates the adjustment from the previous reporting period.

Figures are accurate as of writing and data has been sourced from Trading Economics.

Interest rates

The Bank of Canada and the United States Federal Reserve raised rates 0.75 percentage points in September. Both nations’ interest rates are at 3.25 per cent, with further hikes expected over the next few months.

The European Central Bank also raised rates by 0.75 percentage points last month, as did Mexico and Saudi Arabia.

The Bank of England raised rates by 50 basis points to 2.25% - the highest level in 14 years. Last week, the pound sank to record lows against the US dollar, necessitating an emergency bond-buying program following a surge in yields on UK government bonds (known as gilts).

Earlier this week, Australia’s Big Four banks’ revealed their cash rate forecasts for the next few years:

• CBA: 2.85% by November 2022, shrinking to 2.35% by November 2023
• Westpac: 3.60% by March 2023, falling to 2.60% in 2024
• NAB: 3.10% by November 2022, staying steady into 2023-24
• ANZ: 3.35% by November 2022, dropping to 2.85% in late 2024

Inflation

Examining inflation, Australia’s rate rose more significantly than most other countries over the latest reporting period. However, at 6.1 per cent, this figure remains relatively low compared to the rest of the world.

Canada (7%), India (7%), Singapore (7.5%), the United States (8.3%), Mexico (8.7%), Brazil (8.73%), the United Kingdom (9.9%), the Euro Area (10%) and Russia (14.3%) were all trending higher, at the time of writing.

Why Australia is taking a different approach

Home loans

Australia’s economy is intrinsically linked to the property market. The majority of mortgages are variable rate home loans, which are directly affected by the official cash rate.

Additionally, fixed rate loans secured during the covid pandemic are now maturing, significantly increasing mortgage repayments for many borrowers.

In the US, 30-year fixed rate residential mortgages are the dominant home mortgage products.

Government-backed home mortgage companies - the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) - buy and guarantee mortgages issued through lenders in the secondary mortgage market, where they are packaged as securities and sold to pension funds, hedge funds and insurance companies as investments.

Therefore, interest rate rises in the US don’t have such an immediate effect on home loan repayments as in Australia. Rates are lifted higher as a means to tame household spending and curb inflation.

Property prices

The national median house price could drop by approximately $150,500 by December 2023, according to RateCity’s analysis of ANZ’s property price forecasts. Sydney’s median house price is set to fall even further, declining around $204,500, to $1,141,650 by the end of next year.

Borrowers who don’t own at least 20 per cent of their property may find that they’re unable to refinance for several years as most banks will charge Lender’s Mortgage Insurance (LMI), potentially negating any possible savings.

This lack of home equity, coupled with high interest rates tends to rein in household spending.

Wages growth

In March 2021, the average hourly wage in the United States was US$30.06. In August 2022, the average had risen to US$32.36. This may seem like an economic boon. The problem is that these increases are happening against the backdrop of generational levels of inflation, according to Forbes.

Despite Australia’s unemployment rate achieving a 50-year low, wages haven’t spiralled out of control.

“Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher,” RBA Governor Philip Lowe said.

Where are we headed?

The RBA expects that the prescribed interest rate rises will help achieve a more sustainable balance of supply and demand in the Australian economy in the months and years ahead.

“This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour,” Governor Lowe said.

As we navigate global pressures on our economy, it’s reasonable to inquire where Australia stands and when interest rates will return to normal? Or are we poised to enter into a prolonged period of stagflation?

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