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CBA boss warns of ‘short sharp contraction’ headed for Australian economy

The boss of Australia’s largest bank has warned that the economy is already declining and that a “short, sharp contraction” is on the way.

Late on Wednesday, the chief executive of the Commonwealth Bank of Australia, Matt Comyn, delivered the company’s annual results.

Although the CBA made an eye-watering $9.6 billion in profit over the last financial year, Mr Comyn warned that tougher times were on the horizon.

He told the Australian Financial Review that he predicted “a short, sharp contraction in the Australian economy.”

“We are definitely expecting a more challenging year ahead than we have seen in the last 12 months,” he added.

However, in some good news, the banking CEO believes a contraction is almost a certainty but a full-blown recession is less likely.

Australia is in the throes of an economic crisis as inflation rose to 6.1 per cent last month, the highest level it’s been for 20 years.

And for the first time in more than a decade, Australia’s central bank has had no choice but to increase the cash rate in a bid to stop rampant inflation.

For the last four consecutive months, the Reserve Bank of Australia has increased interest rates by 1.75 percentage points and Mr Comyn more rate increases will come.

Mr Comyn told the publication his bank predicts the cash rate to increase by another 75 basis points to sit at 2.6 per cent.

The cash rate is currently 1.85 per cent.

Once the cash rate hits 2.6 per cent, Mr Comyn said the economy would experience a contraction of 1.5 per cent.

He said he “hoped” that once the cash rate reached this point it would be enough to curb spending, adding “We need to see a slowdown in demand.”

Speaking to the ABC, Mr Comyn said “We do forecast recessions in the US, UK and Europe. We don’t believe that that’s the likely outcome in Australia.”

Already there are signs that Australians are splashing their cash less.

Mr Comyn said their customer data shows that spending is falling for both debit and credit cards.

This was significantly more for customers who had mortgages.

“It’s quite early post the immediate rate rises, [but] we are already seeing a downturn in spending across our customer base, both from a debt and credit perspective,” he said.

“Of course, that’s more pronounced with customers who have a home loan, and we expect that it will continue throughout the course of the calendar year.”

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Business

No mortgage? Here’s why you should still pay attention to interest rate rises

This week, in a further attempt to curb rising inflation, the Reserve Bank of Australia (RBA) raised the country’s cash rate for the fourth month in a row.

With the cash rate now at 1.85 per cent, those who took out low-interest loans during the last two years are facing the potential of hundreds of extra dollars each mortgage payment.

But for those who don’t have a mortgage, the concern around rising interest rates might be confusing.

What is the cash rate and why is it going up?

Know how your iceberg lettuce is costing $10 a head right now? It’s just one of the signs of inflation is soaring at the moment.

In June, annual inflation hit 6.1 per cent, the highest level in 21 years. This is due to multiple factors including supply chain interruptions from COVID-19 and the war in Ukraine.

To curb this inflation (the RBA usually likes to have it around 2–3 per cent) the RBA has rapidly been increasing the cash rate since May this year.

This means the amount of interest banks and lenders must pay on the money that they borrow between each other increases.

Banks will usually pass on the rate rise, like we saw earlier this week, and the higher cost of borrowing dampens demand and economic activity.

When it becomes more expensive to borrow money, there’s less demand for goods and services in the economy and the rate of inflation will usually decline.

First home buyers could be pushed back into renting

According to PropTrack senior economist Paul Ryan, a rising cash rate does not automatically mean your rent is going to go up.

“There’s not a direct effect of cash rate onto rents but they’re definitely inter-related,” he said.

“There may be some kind of attentiveness effect here where landlords see rates rise, they assess their costs and that may prompt them to raise rents for renters. But that is not the only reason, the other reason they are able to raise rents because the demand for rentals is so great.”

A combination of factors including returning international students and tourists, as well as housing market changes brought by COVID has seen rents rise dramatically over the last 12 months.

.

Categories
Business

No mortgage? Here’s why you should still pay attention to interest rate rises

This week, in a further attempt to curb rising inflation, the Reserve Bank of Australia (RBA) raised the country’s cash rate for the fourth month in a row.

With the cash rate now at 1.85 per cent, those who took out low-interest loans during the last two years are facing the potential of hundreds of extra dollars each mortgage payment.

But for those who don’t have a mortgage, the concern around rising interest rates might be confusing.

What is the cash rate and why is it going up?

Know how your iceberg lettuce is costing $10 a head right now? It’s just one of the signs of inflation is soaring at the moment.

In June, annual inflation hit 6.1 per cent, the highest level in 21 years. This is due to multiple factors including supply chain interruptions from COVID-19 and the war in Ukraine.

To curb this inflation (the RBA usually likes to have it around 2–3 per cent) the RBA has rapidly been increasing the cash rate since May this year.

This means the amount of interest banks and lenders must pay on the money that they borrow between each other increases.

Banks will usually pass on the rate rise, like we saw earlier this week, and the higher cost of borrowing dampens demand and economic activity.

When it becomes more expensive to borrow money, there’s less demand for goods and services in the economy and the rate of inflation will usually decline.

First home buyers could be pushed back into renting

According to PropTrack senior economist Paul Ryan, a rising cash rate does not automatically mean your rent is going to go up.

“There’s not a direct effect of cash rate onto rents but they’re definitely inter-related,” he said.

“There may be some kind of attentiveness effect here where landlords see rates rise, they assess their costs and that may prompt them to raise rents for renters. But that is not the only reason, the other reason they are able to raise rents because the demand for rentals is so great.”

A combination of factors including returning international students and tourists, as well as housing market changes brought by COVID has seen rents rise dramatically over the last 12 months.

.