Interest rates and cost of living to keep rising every month until January

The RBA hiked interest rates again on Tuesday. Now experts have warned the pain will continue to worsen for many months.

After the Reserve Bank of Australia (RBA) announced its third consecutive interest rate rise, expert economists say Aussies are in for many more months of financial pain.

The RBA announced on Tuesday that it was increasing rates by 50 basis points, taking them from 0.85% to a new high of 1.35%.

Dr Shane Oliver, chief economist at AMP, said Australians can expect the interest rate to continue rising for the rest of the year, though not at such a dramatic rate.

“The interest rate and inflation rate will slow down such that by the end of this year we’ll only see a cash rate rise of 2.1 per cent and ultimately a peak of 2.5 per cent by the end of the first half of next year,” he said.

Interest rates are expected to keep rising, but slowly.

Mr Oliver said the rising rates were a result of the RBA attempting to allow the economy to recover from the impacts of the Covid-19 pandemic, war in Ukraine and the NSW-QLD floods and energy crisis in Australia.

“The interest rates would have gone up anyway, but with the economy still recovering it’s just gone up more rapidly,” he said.

“What the RBA is trying to do now is they’re trying to signal that they’re really serious about getting inflation down and start to cool the demands of the economy.”

But as real wages continue to remain far too small to combat the rising cost of living pressures, Dr Oliver said the RBA will be watching out to see that the interest rate doesn’t fly too high.

“Effectively, higher interest rates have the effect of taking spending power away from households which takes off demand in the economy which helps lower inflation,” he added.

“But ultimately the economy will slow down faster than the Reserve Bank can keep up with because of all these cost of living pressures and the vulnerability to high interest rates.

“While the RBA is committed to bringing inflation down it doesn’t want to bring on a recession – because if it does, inflation will collapse and we’ll be back to pandemic-level low inflation.”

While rising interest rates mean the property market will slow down, for most Australians cost of living pressures while continue to be a struggle.

As Australians continue to struggle to pay the rent, repay mortgages, afford petrol and daily groceries, REA Group senior economist Eleanor Creagh said consumer confidence was plummeting towards Global Financial Crisis levels.

“But I would also point to the fact that households do have significant buffers that they have accumulated throughout the pandemic,” she added.

“Households are sitting on some 240 billion dollars in excess savings … and the labour market is strong at the moment.

“Unemployment is the lowest it’s been since the 70s and that will promote a degree of confidence in job security and hopefully in turn stronger wages growth.”

What does it mean for first home buyers?

While rate rises might be spooking first home buyers, Mortgage Choice broker Chris Longwill said it’s still a good time for them to enter the market.

Mr Longwill advises potential home buyers to “rein in your lifestyle” and save any additional income straight into your savings account.

“Don’t live beyond your means because when you buy a house, prepare yourself to have a more important commitment than going out three times a week for drinks,” he said.

“If you can save your mortgage repayments per month plus a buffer usually $2000, then you’re mortgage ready.”

He also advises to avoid taking out of your savings as “banks don’t want to see you dip into your savings account”.