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We are nearly there. Rate rises to end soon

By Catherine Rayward

It has been a stressful year for mortgage holders with average mortgage repayments increasing by $1,000 a month since the start of 2022. With less cash to spend on other things, this is now slowing down the economy and we saw this most clearly in retail trade figures released last week. Unfortunately however, inflation is yet to slow and with it hitting a 30 year high of 7.8 per cent in December, it was no surprise that the Reserve Bank of Australia increased the cash rate by 0.25 per cent today.

While this is unlikely to be the final rate rise, it is likely that the increases will stop soon as inflation comes down. These are the reasons why:

Supply chains are moving more smoothly again

The Baltic Dry index measures the cost of shipping goods worldwide and is calculated on a daily basis. The index hit a peak in early October 2021 as the easing of COVID-19 restrictions kick started the world economy. Since then, shipping costs have come down 85 per cent. This reduction will lead to lower inflation this year.
Oil prices are coming down
Crude oil prices hit a peak in March 2022 as the war in Ukraine started and the rebounding global economy increased demand for oil. Since then, there has been a price cap introduced on Russian oil and the world economy has slowed. As a result oil prices have fallen almost 40 per cent and this is flowing through to the bowsers.

Construction costs are starting to stabilise

Rising construction costs continue to be the biggest component of the strong inflation numbers. In many respects, the construction industry has been the worst impacted by post-COVID impacts. Low population growth has increased wages costs, supply chain blockages have increased the cost of goods and a surge in activity from both property development and infrastructure programs has meant there are too few builders. With the economy slowing, this will also mean that construction costs increases start to soften.
US inflation is coming down

Australia doesn’t always follow the US on every metric but most of the drivers of high inflation are the same in Australia this cycle. US inflation is now coming down and now sits below Australian inflation. Rate rises in this country are slowing as a result.

The economy is slowing

Rising interest rates are designed to slow the economy and we are finally getting signs that this is happening. Building approvals have pulled back significantly and last week we saw retail trade fall for the first time in over a year. Consumers are finally easing off spending which will be another factor driving down spending.

International migration has started again
Unemployment is now at a 50 year low and while this is good news, it is creating problems for the economy. Many businesses are unable to find staff, or have to rely more heavily on contractors. This is increasing the costs of goods and services. International migration levels coming back to pre-pandemic levels means more workers to fill roles and calm prices.
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