From an analyst’s point of view, 2022 was a good year. There was plenty to talk about and people other than us were interested to know about what was happening with interest rates for once. People don’t often talk about these things for fun or because they find them interesting – they’re only a topic of discussion because of the consequences have on their lives. In terms of the prices we pay, how much disposable income we’re left with, and the effect on our portfolios.
As widely priced in by financial markets, the RBA has increased interest rates by 0.25%. In many ways, the RBA was one of the first central banks in the world to flinch in the game of interest rate chicken moving from a 0.5% interest hike to 0.25%. Inflation in Australia was more subdued compared to other countries and there has been around a six-month lag between the US and Australian CPI figures. With the official CPI figure peaking at 9.1% in June last year for the US it’s likely that our CPI also peaked in December at a more subdued 7.8%.
The reasons for this have been varied with wage inflation being less of a problem in Australia because 60% of the workforce is on enterprise bargaining agreements which take time to re-negotiate. This will slow further as overseas migration returns due to the change to unlimited working hours for overseas students. In addition, energy prices rose later in the year and widespread flooding from back-to-back La Nina events caused major disruption in the farm outputs and food prices. The successive rate rises are still working their way through the economy with house prices having fallen, shipping costs returning to pre-pandemic levels, and lending growth turning negative and weakening retail spending.
In their internal discussions, the RBA must be calling victory in the inflation fight. With global recession widely anticipated they must also be worried about going too far and sending the economy into recession. As we have previously mentioned we have been living in opposite world for a while with bad news for the economy being good news for asset prices because of the predictable response by the central banks when there is a downturn.
In addition, at a cash rate of 3.5% around 15% of mortgage holders will be pushed into negative spare cash and will have to risk defaulting on their loans. The RBA is aware of this and if we ignore the rhetoric for a second and just concentrate on the actions, it’s clear that the housing affordability issue is a problem that no politician or central banker wants to solve. They’re almost certainly all homeowners and investors themselves. With just about all indicators pointing to lower inflation in the coming months, if we’re not already at the peak of the interest rate cycle we’re likely only one or at most two rate rises away. The turning or even pausing of the rate cycle will see the second half of the bull market in the Australian property market.