Don’t panic, plan for it

Shaun H. Ruff


After 11 years of exceptionally low cash rates, the Reserve Bank of Australia (RBA) has decided to raise interest rates for the second time from 0.35 per cent to 0.85 per cent, in keeping with the global trend.

More rate hikes are expected in the coming months, as the RBA hinted at when it announced the first-rate hike earlier this month. 

However, Adrian Knowles, CEO of Harcourts Australia, believes that rather than being a reason for concern, the change indicates that it is time for Australians to factor in further rate increases into their plans.

“Understandably, people are worried about what this rate rise, and others, will do for their mortgage, buying or selling plans”, said Mr Knowles.

“For many people, especially the younger generations looking to get into the market, they’ve never known a time where interest rates have risen, or even what a normal cash rate environment looks like.”

“It’s not a time to worry about doom; we need to put our trust in the market’s ability to adapt to these changes and continue solidly.”

According to reports, inflation in Australia is projected to rise further before falling back into the 2% to 3% area next year.

Despite this, Australian retail sales increased by 0.9% in April 2022 due to increased expenditure in the food industry. High food prices have paired with increased household spending over the April vacation season, as more people travel, dine out, and have family reunions. 

The National Retail Association’s CEO, Dominique Lamb, previously stated that it comes as no surprise because everyone is aware of the economy’s inflationary pressures, which drove this month’s rate increase.

“The danger for retailers will be if we see further increases before there has been time to assess the impact of the first-rate rise properly.  So we caution against using these figures as a reason to try to curb spending when we don’t yet know the impact of the May increase,” Ms Lamb said.

Cafes and restaurants continued to perform well in April, with a 3.3% increase, while Clothing, Footwear, and Personal Accessories (3.1%) also did well. Both household goods (-2.7) and department stores (-2.5) fell for the month, as per ABS data.

Ms Lamb stated that the excellent results were not uniform across the country, and she asked policymakers to remember that certain retailers were still battling to recover from COVID.

“Some will feel the pain from the recent rate hike more sharply than others, and some will struggle to pay the additional superannuation and minimum wage rise that will come in from July 1,” Ms Lamb said.

“People making decisions about those factors – wages and interest rates – need to keep in mind that thousands of small businesses are still doing it tough, even though some states and some sectors are thriving.”

Nonetheless, sales in two categories fell this month, with household goods retailing decreasing by 2.7% and department shops falling by 2.5%. Adrian believes that a drop in sales is unsurprising. 

“In terms of sale values, we had also seen cooling down period over the last few weeks, which was expected considering prices were up 35% since before the pandemic, and a rate rise was naturally going to impact that somewhat, he notes.

“It’s also to be noted that it’s entirely normal for demand to fall in advance of a federal election, as uncertainty on any front always causes a moment of pause for both sellers and buyers.”

A sober pointer to inflationary pressures

According to Innes Willox, Chief Executive of the national employer association Ai Group, the Reserve Bank’s higher-than-expected interest rate increase announced is a testament to the economy’s strength and is also a sobering indicator of the sharp rise in inflationary pressures – most recently from energy costs. 

Innes adds that if the government decides to find in favour of the following national wage case decision, the risk for businesses increases.

“The rate rise emphasises the importance of lifting the economy’s supply capacity by raising productivity, accelerating the resumption of skilled immigration, and making further progress in lifting workforce participation. There is no time to lose,” Mr Willox says.  

July 1 is also an important date to remember because many salaries are reviewed from this day, and a larger-than-usual repricing of consumables will almost certainly take place at this time.

Coles CEO Steven Cain recently stated that he had five times as many suppliers asking price increases as at the same time last year. Coles and Woolworths prices have already risen by 3.2 per cent and 4.3 per cent in the March quarter, respectively.

According to Anneke Thompson, Chief Economist at CreditorWatch, the new Labor Federal Government has also backed a rise in the minimum wage to match the latest inflation rate of 5.1%. 

While the decision is ultimately up to the Fair Work Commission, experts generally agree that workers on the minimum wage need a hefty pay increase to keep up with growing prices and house loan rates. If real wages fall too far, the risk of a recession and rising unemployment skyrockets.

Not necessarily a sign of doom

Lisa Pennell, COO of Harcourts, adds that while rate increases may naturally frighten some people, it’s vital to realise that they’re not necessarily a portent of doom, but rather that rate increases signify a robust economy – paradoxically, too strong.

“Slowing the economy down before it gets away from us by normalising the cash rate is an important measure that the RBA understands. Inflation is the highest since the introduction of the GST in 2000 and thus can’t be ignored – inflation has a broad impact for all Australians, not just those invested in the property market”, says Ms Pennell.

“The RBA is doing what it needs to do, which is a good thing. And while speculation can make for interesting reading, if we’ve learned anything from the past two years, it’s that we shouldn’t try too hard to see the future.”

“The main consideration for buyers and sellers should be concentrating on factors such as job stability, do they have children of other dependents, are they going to have children, might one parent want to be a stay at home, thus reducing household income, what location they’re looking in etc. These factors will play a heavy role in determining exactly when the right time for them to buy or sell is.”

“Play the cards in front with one eye on the immediate future.”

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