The past 12 months have seen significant reductions in consumer confidence and spending. This has flowed through to falls in business confidence. However, it can be argued these factors are more of a “hangover” reaction from Covid-19 stimulus injected into the economy, inclusive of record low interest rates. The reality is that the current RBA cash rate at 4.35%, is in fact broadly in line with long-term averages – as are mortgage interest rates.
It is likely that forecast improvements in consumer spending and business confidence going forward, will come from moderating inflation and housing costs, as well as tax cuts and wages growth. There will also have to be some acceptance that only moderate interest rate relief will be forthcoming.
As can be seen in the above graph, the current RBA cash rate of 4.35% is close to the 30 year cash rate average. However it must be said, that the trendline for the cash rate over this period, does have a general downward bias. The point here, is that some politicians and sections of the media, are portraying the current cash rate as exceptionally high. They are building expectations for mortgage holders, that significant mortgage rate relief will be on the way, in the next year or two.
The reality is that the cash rate is not particularly high – it is just that it increased to the current levels rapidly, from a particularly low base. The low rates in 2020 to 2022 were in effect an “emergency setting” by the RBA, to stimulate the economy during the COVID-19 pandemic. The “hangover effects” of this are as follows…
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