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RBA ‘at risk’ of ‘overshooting’ on rates

RBA governor Philip Lowe and money.
RBA governor Philip Lowe has come under fire for his approach to hiking interest rates. (Source: Getty)

The Reserve Bank of Australia (RBA) has hiked interest rates five times in as many months, with households now paying up to $1,200 a month more on their home loan repayments.

The rapid hikes have put unprecedented pressure on Aussie households, especially those who hadn’t experienced a rate hike in the past 11 years.

It’s no surprise that with cost-of-living pressures so high, many Aussies are frustrated by the interest rate hikes.

HIA economist Tom Devitt said the central bank was taking things too quickly.

“The RBA’s intention is to bring Australian inflation back to its 2-3 per cent target,” Devitt said.

“But the nature of the current cycle means the RBA risks pushing the cash rate too high.”

Devitt said the RBA’s moves had already started putting pressure on home lending, meaning fewer Aussies were looking to purchase a home which, in turn, led property prices to decline.

“In July, new home sales declined by 13.1 per cent and home lending declined for all market segments – renovators, investors and owner-occupiers, including first home buyers,” he said.

“With long lead times in this current cycle, there is a greater risk that the impact on unemployment of a rapid rise in the cash rate will be obscured and that the RBA will overshoot with unnecessary rate increases.”

Why is the RBA hiking interest rates?

The main driver of the RBA hiking rates is inflation - or cost-of-living pressures.

We are in an odd predicament at the moment where the next move is not as clear as past experience.

In 2020, the economy came to a complete halt as a result of the COVID lockdowns. In response, the RBA cut the cash rate to 0.1 per cent.

The RBA did this to make borrowing money significantly cheaper for the Government, businesses and people.

The ultra-low cash rate was meant to help what little economic activity we had to continue.

Then the lockdowns in Australia ended and things started to get back to normal - in fact, activity in Australia picked up much faster than anyone anticipated.

However, lockdowns were continuing in China. This is important because China is a manufacturing hub. Most of the things we buy are made in China.

The lockdowns in China impacted supply chains in a massive way. While their factories were closed, the demand for the things those factories made did not slow down, but the supply of them did.

While borrowing money was still cheap, this drove up inflation. People were flush with cheap cash, so were willing to pay more for the things they wanted.

On top of this, Aussies had a lot of savings, having not gone out or travelled in two years.

Then Russia launched the war in Ukraine. This caused disruptions to the global oil supply because Russia is a major oil-producing nation.

This drove up the price of petrol and energy - both of which rely on oil.

So, factors completely out of our control here in Australia started causing major price problems.

All of a sudden, everything was costing a lot more. Inflation was rising quickly.

The only weapon in the RBA’s arsenal is interest rates. The RBA started raising the interest rate to make borrowing money more expensive.

The goal was to put pressure on borrowers so they stopped spending money on other things.

If we pull back on spending, the demand for things won’t be as high, so prices will come down.

It’s a tricky line to toe.

Ultimately, the RBA is attempting to get inflation under control by making things more expensive. It may seem counterintuitive, but it’s the only choice the central bank has.

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