Some investors have been spooked by the RBA hiking interest rates by 0.75% over the past two months, particularly since it has spent the past two years telling us that rates would not rise until 2024. Higher interest rates at the same time as rising prices (inflation) are a two-fold blow for household budgets.Where are interest rates heading?The banks predict that the cash rate will rise by a further 1.40% to 1.50% by March 2023. Money markets have priced in a cash rate that is more than 2.60% higher by March 2023, but most commentators feel this is too hawkish, and unlikely to happen.The theory is that, due to higher inflation, the cash rate should return to the neutral rate as soon as possible to avoid monetary policy adding to inflationary pressures. The neutral rate is when the cash rate is neither economically expansionary nor contractionary. Most commentators believe the neutral rate is between 2% and 3%.Ironically, inflation may force rates to fall againAustralian inflation is currently 5.1% p.a. and will certainly read higher in the June quarter. Inflation in other developed economies is approaching 10%. But anyone that's visited a supermarket or petrol station lately knows that inflation is a lot higher than what the CPI measure reflects. This higher inflation has already dampened consumer and business confidence, which will cool economic growth (GDP).The neutral cash rate might very well be between 2% and 3% when prices of goods and services are at normal levels. However, given the backdrop of much higher prices, it is very likely that the natural rate is closer to 1% to 1.5%. Therefore, if the RBA raises rates too far at the same time prices are very high, it will result in a decline of economic growth (GDP). In fact, last week CBA forecasted that will happen and the RBA will cut rates by 0.50% in the second half of 2023.Don't overreact to recent rate risesI was watching TV with amusement last week. Reporters were interviewing people about the RBA's recent 0.50% rate hike. People were talking like interest rates were 10%! Of course, I shouldn't be surprised at the alarmist nature of TV!The reality is that interest rates are still very low by historical standards. By the end of this month (i.e., after the most recent rate hike filters through to mortgage rates), standard variable home loan (P&I) rates will be around 4.75% p.a. and investment (IO) rates approximately 6.10% p.a. Of course, new borrowers are offered hefty discounts of 2% p.a. or more off the standard variable rate. Therefore, most discounted home loan rates will be in the high 2%'s to low 3%'s
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/
Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Investopoly