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How Will Households Be Affected with RBA’s Interest Rate Adjustments?

Despite higher interest rates, the housing market remains robust, with home prices persistently on the rise.

Michele Bullock, the first female governor of the Reserve Bank of Australia (RBA), is taking charge during a period of significant change. The frequency of interest rate decisions may decrease, but the extent of rate movements could potentially increase. Bullock, a long-time veteran of the RBA, is succeeding Philip Lowe, whose term was not extended. The RBA’s communication during the pandemic and inflation-driven rate hikes prompted a review and subsequent reforms.

Michele Bullock, first female RBA governor

The RBA is poised for a substantial transformation, driven by recommendations from its first independent review in decades. The review suggests measures to enhance the RBA’s operation, including the creation of two distinct boards, increased transparency around interest rate decisions, and improved forecasting abilities. Starting from February, the RBA board is set to meet eight times per year, with the meetings extending over two days. In alignment with practices of other global central banks, the governor will be expected to publicly justify interest rate decisions on the same day, followed by a media conference. Some recommendations, like the establishment of separate boards, will require parliamentary approval. More contentious measures will be deferred until the new board is in place.

After a decade of stable or declining interest rates, the RBA has swiftly increased the official cash rate from 0.1% to 4.1%, reacting to mounting inflation. Consequently, mortgage repayments for borrowers have risen significantly. While further rate increases are anticipated in the upcoming months, economist Diana Mousina predicts a return to rate cuts by 2024. She asserts that a long-term cash rate of 4.6% is untenable for Australian households. Despite higher interest rates, the housing market remains robust, with home prices persistently on the rise. Nevertheless, the risk of price drops may materialize as borrowing capacities shrink and economic conditions deteriorate due to sustained higher interest rates, echoing the experience of 2022.

The RBA’s reforms could hold implications for borrowers. Though primarily aimed at internal RBA processes, economist Diana Mousina proposes that a reduced number of meetings might lead to fewer interest rate decisions. This could potentially result in a less flexible RBA and larger rate adjustments. She also expresses concern that the proposed changes, including more regular public engagement by board members and alterations to the board’s structure and voting process, may generate confusion for households. Mousina underscores the necessity of a unified strategy and lucid communication to guide households and inform the markets. The new mandate for the RBA governor to conduct regular press conferences following interest rate decisions seeks to minimize speculation. However, Mousina remains uncertain about how the reforms might benefit everyday households impacted by the RBA’s decisions.