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Rates are going up. What's next?
The Reserve Bank of Australia (RBA) raised the official interest rate with a 0.5 percentage point rise to 1.35%. The move is in response to curb strengthening inflation.
In his commentary of the RBA’s latest move, Peter Esho, co-founder at Wealthi said, “Today's 50 basis points rate rise was in line with expectations and with quarterly inflation numbers. There is a case for more rises coming in July and August. We're of the view that the cash rate will rise to around 2-2.25% by the end of the year.”
In a discussion immediately after the RBA decision, Peter highlighted the efforts of central banks in developed economies to address the issue of inflation.
He also pointed out that the big untold story is what's happening in the United States where 10 year bond yields fell well below 3% on Friday. This is well off the peak level in the mid 3% range. It implies growth expectations are falling.
From his perspective, Peter said, “We think a recession is on the cards towards the end of this year. The RBA continues to point to external factors as drivers for its decision. It's now using the word "extraordinary" to describe the rate setting we've had over the past few years.
“We're of the view that rate rises will cap out, probably in 6 months, followed by a short and sharp recession that will act as a reset.”
But it also admits that medium term inflation isn't a problem, which means that a short and sharp recession is the most likely outcome in the near term. At that point, the RBA will halt and probably sit at the 1.5-2.5% cash rate level for a few years to come.
If you want to know more or to discuss the impact of this rate increase on your investment property, contact the Wealthi team: