Interest rate hike RBA: US Fed rate rise concerning sign for Australia

A move by the US central bank could mean Australians are set for some mortgage pain after this week’s first rate hike in 12 years.

The US Federal Reserve’s decision on Wednesday local time to raise interest rates by a whopping 0.5 per cent has sent shockwaves around the world, including in Australia.

It was the nation’s biggest rate rise in 22 years and came as a desperate measure after the US annual inflation rate reached 8.5 per cent in March, the worst it’s been in four decades.

With Australia’s interest rates going up for the first time in 11 years this week, Aussies are on edge, and some see developments in the US as a warning sign of what’s to come.

The Reserve Bank of Australia on Tuesday afternoon announced it would lift Australia’s official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent.

It is the latest attempt to clamp down on skyrocketing inflation in Australia, which has reached an annual rate of 5.1 per cent and has sent prices climbing at the fastest rate in two decades.

Two months ago, the US central bank lifted rates by 0.25 percentage points — exactly the same amount that Australia did this week — which was the USA’s first increase since December 2018.

Tony Sycamore, from City Index, believes in a month’s time rates will rise again, possibly by as much as 0.5 per cent like our American counterpart.

“In terms of the RBA it has left it a little bit too late, so there is certainly a need to raise interest rates [more],” he told news.com.au.

Mr Sycamore warned that some market commentators and banks have forecast multiple rate hikes of 0.5 per cent in coming months. Australia’s interest rate could sit as high as three per cent by year’s end — a huge jump from its current 0.35 per cent.

If the rate did jump to 300 basis points, that is an eye-watering amount, he explained.

“It’s not like going from four per cent to seven per cent. To go from zero per cent to three per cent is extremely aggressive,” he said.

Multinational investment bank Goldman Sachs announced on Wednesday that they expected the RBA to raise the rate by 50 basis points in both June and July.

By the end of the year, they predict the cash rate will be at 2.6 per cent.

However, Mr Sycamore has a more moderate view himself.

He pointed out that although Australia appeared to be following in the footsteps of other western nations feeling the crunch of inflation, our situation isn’t as extreme.

Australia’s annual inflation rate is 5.1 per cent while the US is at 8.5 per cent and Europe is sitting on 7.5 per cent, meaning Australia’s central bank doesn’t have to be quite as extreme.

Mr Sycamore is predicting a 0.4 per cent rate rise for June — which is still a significant amount, a lot more of a rise than what happened on Tuesday.

“In June I think 40 basis points which would get us to 0.75 per cent,” he said.

“Then I’m looking at 25, 25 and 25 basis points in July, August and November.”

This would put the cash rate at 1.5 per cent by the end of 2022.

“My view is we don’t get anywhere near three per cent [by the end of the year]I think it will be 1.5 per cent.”

Westpac shared his view, calling on a 40 basis point rise for next month.

The Commonwealth Bank of Australia is forecasting a 0.25 rise again.

But no matter how much rates rise, the bottom line is that they will go up.

Joust and Digital Finance Analytics (DFA) found that 42.2 per cent of mortgaged households were experiencing financial stress in March 2022 — and that was before the rate hike.

Mr Sycamore said a third of all Australians had a mortgage and were being negatively impacted by the rises.

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