[HSC] Economist: 11th July

A summary of this fortnight's Economics news: rising cash rate and floods!

Zack Bolland

Zack Bolland

99.80 ATAR, Dux, 8th in NSW for Econ

Over the last two weeks, there has been quite a bit of activity in both the domestic and global economies. Elon Musk backed out of his Twitter takeover deal. Europe is about to commit to a total cutoff of Russian gas supplies. Boris Johnson resigned as the Prime Minister of the UK. Former Japanese Prime Minister, Shinzo Abe, was assassinated in a deadly shooting. An IMF chief noted that the outlook for the global economy “darkened significantly” and that a worldwide recession is not out of the picture. Australia saw a month’s worth of rainfall over the course of a few days. Unsurprisingly, the RBA also made the decision to lift the cash rate by 0.5%. This fortnight’s article will focus on the recent Australian floods and the cash rate decision, as well as the effects of each event on the broader economy.

The recent cash rate change and what it means for the future of the Australian economy

Last week, the RBA made the decision to lift the cash rate by 0.5 percentage points to 1.35%, with the cash rate exceeding 1% for the first time since 2019. Given that the cash rate was only 0.35% two months ago, this pattern of cash rate hikes is aggressive and is “one of the sharpest rate increases since the early 1990s” according to ABC. These rate hikes are a direct response to the rising inflation level in Australia, which is tipped to exceed 7% before the end of 2022.

Due to the recent cash rate hike, many economists are reconsidering their predictions for what inflation and the cash rate will look like by the end of the year. After the first cash rate hike this year, most economists projected inflation to reach 7% and for the cash rate to reach 2-3% before 2023. However, economists like Marcel Thieliant from Capital Economics are expecting inflation to reach 8% and the cash rate to reach 3.5%. That being said, economists predict that the aggressive approach to cash rate hikes is a short-term trend and that the RBA will “chill out” soon enough.

Understandably, the recent cash rate hike has been met with criticism. For instance, Peter Davidson from the ACSS argues that cash rate hikes will hurt low-income earners to the greatest extent, with the 900,000 citizens stuck on unemployment payments suffering the most. Whilst many are concerned about the cash rate itself, others are concerned about the rate at which the RBA is making their decisions.

Monetary policy is generally said to have an impact lag of 6-18 months, meaning that after the interest rate has changed, the full effects of the transmission mechanism won’t be seen until at least 6 months. Therefore, when the RBA decides to change the cash rate rapidly, everyday citizens are not able to fully understand the effect that each individual cash rate change has had on the economy. Furthermore, for aspiring homeowners, it becomes increasingly difficult for them to predict the long-term trajectory of interest rate increases, making it difficult to determine whether taking out a certain mortgage is possible or not.

Speaking of homeowners, national auction clearance rates declined to 63.2%, which is significantly lower than the 79.5% recorded at the same time last year. In Sydney, the clearance rate has fallen to 54%, partly because aspiring homeowners are anticipating house prices to decline even further and are increasingly scared of overpaying. Whilst clearance rates have dropped off, the length of time that properties have been listed on the market has risen. Due to the fear of over-paying, houses are being left on the market for excessive periods of time, as potential homebuyers wait for the next cash rate hike.

**Floods, floods and more floods - how have the recent floods impacted the Australian economy?**‍

Shifting away from the property market, Sydney has experienced significant rainfall as of late. Certain areas experienced up to 350mm of rain last week, with suburbs surrounding the Nepean River suffering the most. As a result, more than 85,000 residents faced evacuation orders and warnings, with many resorting to the assistance of emergency services and the SES.

Experts are becoming increasingly concerned about the level of rainfall in Sydney, as Australia suffers “dangers on multiple fronts”, with flash flooding, riverine flooding and coastal erosion occurring simultaneously. Political leaders are also concerned about the recent flooding but have told media outlets that they have “learnt from the February floods” earlier this year.

In response to these concerns, the Federal Government announced a disaster recovery package that delivers $1000 to every eligible adult and $400 per eligible child who suffered significant loss or damage during the recent floods. This applies to 23 local government areas across NSW and should relieve some of the additional costs accrued amidst the floods. Many households have had to resort to insurance claims, with more than 8000 requesting insurance coverage in NSW alone, where the cost of insurance is expected to reach $100 million.

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