Has inflation peaked? What does that mean for interest rates?

The Reserve Bank of Australia has announced another increase to the official cash rate in December, and with it, we’ve had our final interest rate increase for 2023. But are this year’s interest rate rises having the desired effect?

There are many economists in Australia who believed that inflation may have peaked as we saw the first significant decline in October with inflation dropping to 6.9% from 7.3% in September. Although this is an unforeseen and positive sign for the future of interest rates, it is still very early to make any concrete predictions on what may happen in the future.

It remains to be seen exactly how effective the RBA’s interest rises from 0.1% in May 2022 to 3.1% in December 2022 have been in stemming the tide of economic demand driving up inflation. As per the RBA’s statement today, “Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.” And this is where interest rate increases can help our economy.

Interest rate increases are designed to reduce the disposable income of Australians with a mortgage as they are required to make larger repayments on their home loans. This results in tighter budgets and less superfluous spending at the shops, driving down demand for certain products to better meet the current global supply levels on certain commodities. The RBA predicts that “Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.” As we see supply and demand more closely aligned, we should also see inflation rates decreasing to a more appropriate 2-3% range.

So why is it taking so long for us to see declines in demand when we have seen such frequent interest rate rises in the past six months?

As the RBA put it; “monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain.”

There are still many mortgage holders who have fixed interest rates and will not feel the impact of the recent interest rate increases until next year when their mortgages return to a variable rate. It is also expected that many households have potentially offset smaller spending habit changes in response to interest rate rises with their savings to cushion their desired lifestyles in the short term. Both are short-medium term factors, and although they are slowing the decline of inflation right now, they will slowly have less and less of an impact over time. However, as the RBA said, exactly when that is remains to be seen.

Interest rates are an important factor when it comes to investing in property, but it is not the only factor and interest rate rises have the potential to affect your portfolio in various ways. If you’re worried about the effect interest rates will have on your investment properties, organise an end of year coaching call with your property mentor and your extended property team.

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