With only a few days left in 2024, and the Reserve Bank of Australia (RBA) has made their final call of the year. It’s been over 4 years since the last cash rate cut, and since then, the cash rate has skyrocketed to heights unseen since 2011. So, has December gifted us a cash rate cut?
The cash rate started 2024 at 4.35%, and to the disappointment of many, that’s how it will end the year. However, it only feels like a matter of time before the RBA makes the call and brings the cash rate down.
Internationally, rates are dropping. The Reserve Bank of New Zealand lowered its cash rate from 4.75% to 4.25% at the end of November, as inflation, like Australia, drops into the RBNZ’s preferred bandwidth. However, while New Zealand’s inflation is similar to Australia’s, New Zealand is also struggling with high unemployment. As stated by the RBA:
“More jobs and higher wages increase household incomes and lead to a rise in consumer spending, further increasing aggregate demand and the scope for firms to increase the prices of their goods and services
What Does This Cash Rate Decision Mean For Homeowners?
Homeowners have seen their repayments spike over the last 3 years, and understandably, may not feel as though they are getting what they signed up for when they first purchased their home. If you’re struggling to meet repayments, you’re not alone, as 42% of Australian homeowners with a home loan have reported financial stress.
If you are struggling, let me know. While I may not be able make your mortgage troubles go away entirely, I may be able to help ease the pain by exploring refinancing options.
What Does This Cash Rate Decision Mean for Homebuyers?
High interest rates mean that if you purchase a home now, you’ll be paying more on mortgage repayments. However, home prices in key capital cities such as Melbourne and Sydney are on the decline. It’s likely only a matter of time until interest rates are cut, So purchasing now could be a good strategy to get ahead of any competition.
When Will Interest Rates Drop?
While we can’t say when the RBA will cut the cash rate, it’s looking more and more likely that it will be within the financial year. A majority of the major banks project a cash rate cut in May.
Whether you’re looking for home loan relief, want to get ahead of the home-buying rush, or want to build your investment strategy, reach out to me today to kick start your 2025 finance goals.
The Relationship Between Inflation and Interest Rates
If you’ve had your finger on the pulse of the finance industry recently, you’ve probably heard frequently about rising inflation and rising interest rates. While investors and economists are fluent in finance lingo, these terms can be confusing for everyday Australians. To most of us, high inflation and interest rates simply mean our day-to-day living is becoming more expensive.
However, inflation and interest rates serve two very different purposes. Inflation measures a change in cost of goods and services, Interest rates exist as a countermeasure to help reduce inflation.
What is Inflation?
Inflation is a measurement used to track the rising cost of goods and services in a country. For example, you purchased a litre of milk for $1.55. Today you go to the store and purchase a litre of milk from the same brand for $1.60. Inflation for that milk would be 3.2%.
When inflation is high, it typically means people are paying more for their everyday goods and services, and regulatory bodies take notice. When prices are down, this is called deflation.
What is Interest?
While inflation extends to all purchases, interest is applied to debts and savings. If you open a bank account with a deposit of $40,000 at 5% interest per annum, you will earn $2000 in interest over the year.
On the other hand, if you have a home loan at 5% interest, and your monthly principal repayment is $3,000, you will pay $150 in interest per month.
Rising interest rates are typically signs of high inflation, as interest is an effective way to combat inflation. Higher interest rates affect how much people looking for loans can borrow, reducing the activity in the market. This means fewer people borrow less money, and the economy can stabilise.
With interest rates remaining high, the hope is that inflation will begin to reduce. For reference, The Reserve Bank of Australia (RBA) raised its cash rate in November 2023, inflation was at 5%. A higher cash rate typically means higher interest rates from the banks.
While consumer spending is a key driver of inflation, it’s not the only one. Environmental factors regularly affect significant shifts to inflation. The Covid-19 pandemic greatly impacted the economy, and some experts equate today’s inflation as the result of high government spending during the pandemic, and high levels of consumer spending as lockdowns ended.
Inflation is currently on the decline, and it’s anticipated that the cash rate will follow suit, possibly in December this year or early next year, however, we can’t say for certain. Inflation could always go back up, meaning high interest rates need to be implemented a while longer.
If you have any questions regarding inflation, interest rates or just want to discuss your finance goals, reach out! I’m always keen for a chat
Warm regards,
John Afendulis
Finance & Mortgage Broker
Next Step Mortgage Broking Pty Ltd
0490 418 759
