Inflation is easing. Consumer spending is slowing. And for the first time in 10 months, the RBA has walked out of its monthly board meeting without hiking the cash rate. Does this mean the cash rate has finally hit the ceiling?
It’s the question us investors want an answer to. Because many players in the market don’t deal well with uncertainty. We’ve watched rates steadily and steeply rise since May 2022, not knowing how much higher our mortgage repayments will go or how much tighter our commercial yields will get. But last week, on April 4th, the RBA announced its first rate hold in 10 months, keeping the official cash rate at 3.60 per cent.
The RBA based their decision on easing inflation and reduced consumer spending. The Reserve Bank says it’s waiting to see whether its 10 consecutive rate rises had a concrete impact on inflation, which recently dropped to 6.8 per cent, as indeed something must’ve influenced its fall.
The States’ economy may also have had an impact on the RBA’s decision. With the collapse of three US banks in three days in March, there was speculation that heightened economic risk could lead to a conservative rate pause by the Reserve Bank.
Regardless of the recent inflation fall, the RBA is sticking with its forecast set earlier in the year and doesn’t expect inflation to return to below 3 per cent (within its targeted of 2 per cent to 3 per cent) until 2025. Of course, expectations change with time and the odd external influence.
It seems most punters are tipping that the cash rate has either hit the ceiling or is a month away from doing so.
Three of the top four banks bet that May 2023 will see the final rate rise before the cash rate begins falling late-2023 or early-2024 (ANZ tip the cash rate will reach 4.10 per cent in June). If the banks do indeed have 20/20 vision, 3.85 per cent will be the peak cash rate, and by early next year we could see it fall to around 2.50 per cent.
But in lieu of a crystal ball, it’s important to look at the information at hand.
Even the Reserve Bank’s governor, Philip Lowe, told the National Press Club – two days after the latest rate announcement – that “we [the RBA] look at the data we have before us. [We] look at progress on inflation.”
The man at the RBA’s helm also points to April 26 being a decisive day ahead of their next board meeting, when inflation data is renewed. “We will have a new set of forecasts, we’ll have an updated inflation reading, and we’ll have a regular flow of monthly data on the labour market, business sentiment and household spending.”
Uncertainty can force many investors to stick hands in pockets and not pull them out until certitude re-emerges. But there are many investors who profit during times of uncertainty, like some commercial real estate landlords who bought under-valued assets during COVID-19 and residential owners who made fortunes from the same period.
Investors had no idea what’d happen to the real estate market during and after the pandemic. And so many, with cash sitting idle in the bank, sat on their hands until the storm of lockdowns and restrictions calmed. By then, the nation’s house prices had risen 23.7 per cent and many east coast markets had begun to soften. The interest rate environment was very different and we’re not suggesting any sort of repeat will occur. But it’s a reflection of what investors can achieve when they stick to time-tested property fundamentals and act rather than delay.
Buy well, in a solid location with a renowned and loyal tenant, and you’ve made the first steps toward a robust, long-term real estate investment – no matter the economic uncertainty.
(Of course, every investor is different and your accountant or financial advisor should be consulted before any major investment decision is made.)
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