Australia Hikes Interest Rates For The First Time Since 2010 As Real Estate Slows

Australia’s central bank raised interest rates for the first time in a decade to try and calm inflation. The Reserve Bank of Australia (RBA) hiked rates this morning, the first hike since 2010. The cash rate is now 0.35%, an increase of 25 basis points (bps). It’s not particularly high, but just a small increase in mortgage rates has already slowed real estate markets.

Australian Inflation Is Late But Forecast To Climb Aggressively

Australia is late to the inflation party but it’s definitely in attendance now. Annual growth of headline inflation reached 5.7% in March, the highest rate since 2001. The RBA’s inflation target range is between 2% and 3%, so it’s currently much higher than they planned. They’ve also forecast headline inflation will climb significantly over the coming months. 

Australian Inflation Forecast To Rise With Interest Rates

The RBA has forecast headline inflation will rise even as they hike interest rates. Their forecast is an average of 6% in 2022, meaning the second half of the year needs to rise much higher. Inflation isn’t expected to reach the central bank’s target range until mid-2024. At which point it’s only expected to touch the top of the target range.

“These forecasts are based on an assumption of further increases in interest rates,” stressed RBA Governor Philip Lowe.

Even with higher interest rates they don’t see the inflation train stopping. They’re actually forecasting higher inflation as interest rates rise. The situation says a lot about the amount of stimulus in the Australian system these days.

Australia To Begin QT, Real Estate Already Slowing

Speaking of stimulus, the RBA strongly indicated the days of cheap money are coming to an end. The Governor said now is the time to withdraw the “extraordinary monetary support.” One such move is quantitative tightening (QT), the process of shrinking the central bank’s balance sheet. This is the opposite of quantitative easing (QE), that helped provide mortgage stimulus. 

RBA’s board determined they would no longer reinvest the funds from maturing bonds. Instead, they’ll begin to let them mature and roll off the balance sheet. The Governor was careful to point out they won’t be selling the bonds, so it will be gradual. However, they did warn their balance sheet size will “decline significantly.”  

Using QT gradually removes credit liquidity which can push mortgage interest costs higher. That’s in addition to higher interest rates, with 0.35% rates still considered stimulus. Until the neutral policy rate is hit, estimated as low as 1.25%, the central bank is still stimulating demand. 

Higher interest rates and falling credit liquidity will drive mortgage rates higher. Though they’ve already been inching higher and proving a hurdle for real estate.

Earlier this week, Proptrack data showed prices in Sydney and Hobart pulled back in April. It was the first monthly decline since 2018, with the national index falling as well. That was before the recent rate hike, that’s likely to provide more borrowing friction.