Latest / Money Grows on Trees / #356 - RBA Warns Aussies Could Be Hit With 7% Interest Rates (Prepare Now)

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#356 - RBA Warns Aussies Could Be Hit With 7% Interest Rates (Prepare Now) · Money Grows on Trees

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  Australia's government debt crossed $1 trillion for
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  the very first time in history. Most people think interest rates are about to come down
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  and the worst is behind us. But the reality is core inflation is stuck
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  at 3.6%. One of the big four banks, Chief Economist, said
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  they're tipping two more rate hikes and lower borrowers are starting to pay close
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  to 7%. on their mortgages at the retail rate. I'm Lloyd J. Ross,
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  a seven-figure investor and entrepreneur. I've helped thousands of everyday Aussies, Americans, New
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  Zealanders, Canadians, and those from the UK to get out of debt and build real wealth. In this
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  video, I'm going to show you the exact chain of numbers that leads to
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  7% mortgage rates, the five fires keeping the Australian inflation hotter
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  than the rest of the world, and the step-by-step playbook to prepare right
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  now before the next move. So let's
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  look at the chain of events to 7% rates, okay? Right
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  now, as I'm recording this, we're at the cash rate of 4.35%. That's the
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  reserve bank rate, okay? That's where they set rates, and that's the wholesale funding
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  rate. After three hikes, it sits there. So we had a hike in Feb,
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  March, and May, and they held recently in June, okay? They've held.
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  Even more so recently in even July and August. So it's sitting
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  there. It's not moving. There's a holding holding and The
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  banks are saying or expecting so this is Westpac's chief economist
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  Lucy Ellis She said there's she expects two more rate hikes
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  given the inflation outlook. Okay, so remember when inflation goes up One
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  of the key ways to stop people spending money is to hit them where it hurts, which is
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  in their debt obligations. So that's the objective of increasing rates. So
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  given inflation's sticky, she expects a cash rate
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  of 4.85%. The RBO's own trigger, it would want to see, this
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  is what it wants to see, two back-to-back bad monthly
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  inflation reports before contemplating another rise. So
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  they want to see an increase in inflation in one month, and then another
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  increase in inflation in another month, and then, okay, that's going to be our signal to
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  raise rates again. So there is an expectation that inflation is
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  going to hit 4.8%. Now, to be
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  fair, inflation might already be that, but when they talk about
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  core inflation, they don't include a lot of stuff. And
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  I just don't think it's even, I don't even think it's 3.6%, I
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  think it's more. The RBA is going to go off a core inflation figure. Yesterday,
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  last night, a Buffalo airport in America ran out of jet fuel. Crack spreads
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  in diesel is now over $100, meaning it's $100 to buy
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  the products of crude oil, even though the oil price is
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  offsetting at $90. So there's a spread between the
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  crude oil price and the products that are being developed for it. So I
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  think we're seeing a move towards higher oil prices. Now, if that happens, it's
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  going to be fed into every product and service on earth,
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  because oil's in everything, and you're going to see an increase in the price
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  of goods, and so you're going to see inflation. Which is what happened in the 70s. That could
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  really materially move the inflation right up beyond
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  5%. That's what could cause more interest rate rises. Total possibility,
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  by the way. We'll probably find out in the next 90 days. Not far
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  away. What borrowers are already paying, this is fascinating. New
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  customers are coming in at 6%, sub-6, just sub-6. Banks
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  are trying to win new customers. We just did an episode on what the banks are
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  actually doing to try and clamor and hold customers and win new customers. But the existing
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  customers are paying 7, just 6.98. So really, it's like, 7% is
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  not really a forecast, it's more of a statement, like it's happened. You
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  might already be paying 7%. And so, if we go another 0.5% at RBA, we
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  might see 7.5%. And the reality is, I remember not too long ago,
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  it was 9%. Some investment loans were 9%, it's pretty normal. So
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  don't discount it. So every 25-point hike,
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  which is 0.25%, is $120 a
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  month extra on a $740k loan, let's say. So
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  every time they shift it a little bit, it's more cash
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  outflow after tax dollars too if you've got a home mortgage. Three rate
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  hikes this year, of course, $360 a month being hit to the
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  consumer. Now, if you add that to what's happening in their cost of living,
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  that's starting to hurt. So two more is $240, right?
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  Which is 600 total since January, which is seven and a half grand roughly per
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  year of after-tax dollars. So you're going to earn $10,000 to pay for the seven. So
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  they've increased the propensity for you to have to earn 10 grand more
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  just to cover the existing line. Does that make sense? The RBA might be stuck when
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  it comes to inflation. They can't move, okay? So if that goes up, they're stuck. So
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  it doesn't really kind of like, the RBA doesn't go, we're going to do 7% retail rates.
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  It doesn't arrive like that. It's more of like a cooking process.
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  It cooks people over time, right? So it really
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  is going to be dictated by inflation, which is why you should be watching the
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  inflation data coming out so you can see what's going to happen. So
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  here's the five fires causing inflation and why the Australian inflation
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  rate won't lie down or correct. Firstly, it's
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  sticky. It's not falling below the 3.6%, right? Headline inflation
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  is 4.6%. So headline inflation is higher. So
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  the real inflation rate is probably a lot higher and that's why it feels like everything's getting
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  more expensive because it really is. Second thing that's happening is there's a housing shortage
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  and that's causing a problem with inflation through rental inflation. So
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  that's not ideal. Rents are way up and that's probably what's causing the headline inflation
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  to rise. I don't think it's going to alleviate very anytime soon
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  because immigration is bringing new people in. So the shortage coupled
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  with immigration is what's really factoring in or inflating or
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  creating the fire of inflation. And of course, then you can add in
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  government spending. $18 billion of extra spending by the government
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  over the next 12 months. $18 billion. And it's all spent
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  on stuff that's not productive. So it's kind of like they're exacerbating this
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  stagflation process where there's not GDP growth and
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  there's inflation. So when you're getting GDP growth and you're getting inflation, it's not
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  too bad. But when you're getting, like in America, they've got very tremendous GDP
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  growth and they've got tremendous inflation. Not tremendous, but they've got an inflation rate
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  less than us, but they've got a GDP growth rate of 5x us. So,
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  they're fine. We're in trouble because we've got a retarded government
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  of career politicians who are useless and stupid and just dumb
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  and left-leaning, wokey idiots,
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  effectively. God, you don't have to be a genius to work that. I can't believe
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  people just even defend the shit that's going on
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  down there in Canberra. It's unbelievable. Anyway, so that's not helping. To
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  summarize what we have, sticky corn inflation, we've got potential of oil spiking,
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  hitting that even harder. We've got static supply of housing and immigration that's
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  gone crazy. So static housing and immigration, government
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  spending, and then we've got lifestyle costs going up as well, rental
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  yields going up. And as I said, oil, there's a bit of a wild card. We
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  don't really know what's going to happen. Oils, it's weird that it's sitting at
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  80. It should be about 200. If you factor in
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  inflation, it should be 200. Basically, the reason I'm saying this is because I
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  don't see a pathway out of high inflation quickly. That's
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  why. Which means I don't see a pathway out of higher rates fast.
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  Which means I don't see an alleviation of the property market quick. Does
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  this make sense? It's all having an impact on the other. So to put this in
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  perspective, the UK has got an inflation rate of 2.9%, lower than ours. The
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  EU is three. Australia, headline, 4.8. Sticky,
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  core, 3.6, whatever. So our peers, we've got a higher
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  inflation rate than any other place. Think about
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  that. Anywhere else. And we've got all these other challenges to
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  go with it. They don't have the same challenge. They don't have the same BS housing
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  market we have. We're in a really, really, really dire spot. If you
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  go and listen to Chris Joy, he's a great economist. He left
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  Australia. He's done some great episodes with Mark
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  Boris and you've only got to listen to Chris Joy talk about this
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  stuff and it's all on the money. So adding fuel to the fire or
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  the challenges we have here is that we've got this trillion dollar problem, okay? So
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  recently, Australian gross government debt passed one trillion for the first time, only
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  in the last week. So check this out. It was, the national debt was
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  700, check, it's crazy. In 2022, the
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  national debt was $715 billion four
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  years ago. It's now $1 trillion. So
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  it's gone up 47% in four budgets. And the interest bill is exploding,
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  right? Because rates are going up. The 10-year bond yield is near 5%. So the cost
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  of servicing that is just soaring. That's interest. It's wasted money. It
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  doesn't buy hospitals. It doesn't buy roads. And I
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  know that the US crossed $40 trillion. I get it, right? And
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  their flipping bond rates are high, too. Over
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  5 cents, but at least they've got GDP growth. We don't have that.
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  So we've got a growing national debt That's going
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  to check it out going to consumption style Programs
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  the NDIS is consumption. It's a flagship structural
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  pressure What it means is the spending doesn't expand
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  the economy's capacity to add demand without adding supply, which
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  is the textbook recipe for keeping inflation high and
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  therefore rates higher. So what's happening into this government, the government policy, and
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  before you couldn't really blame government. But now, actually you can, because
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  these policies they're putting in place are causing a lot of these problems, right?
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  Just quickly, if you're ready to take control of your finances but feel stuck on
• 8:48
  where to start, I have a solution. My book, Money Buys Happiness,
• 8:53
  simplifies investing and wealth building with practical steps to help
• 8:56
  you achieve financial peace. Get your copy via the
• 8:59
  link in the show notes and let's get your money working for you. Now back
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  to the episode. So there's going to be an exacerbated national debt.
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  Costs go up because bond rates are going to go up. That means that
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  we're going to have less productivity, which means we're going to have more inflation, which means we're going to have higher
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  interest rates for longer, which means you're going to struggle for longer. So putting
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  the numbers on it for you and us as Australians, we
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  hold like $2.6 trillion in mortgage debt. It's gnarly. you're
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  gonna find an extra $300, $400, $500 a month is gonna be
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  needed because of this increase in rates. So that's an extra 10, 15, 20K a
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  year of money you gotta find to then pay tax and then pay that if it's personal debt.
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  So it just drags on for longer and you just get slowly boiled. I
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  used to think that, oh, if there's a correction, it's gonna happen quick and the bayonet is gonna be taken
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  off far. No, it seems like when the economy goes into a
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  period of stagflation and we shift things and pricing of
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  housing changes, it's a long protracted, painful process.
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  Which is why you're seeing now an uptick, and it could be my algorithm, but
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  I think I've never experienced this before or seen this, but never
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  in my life have people spoken about leaving Australia. Ever.
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  They just haven't. But now they are. So
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  I don't think people are going to stick around to be boiled, right? So
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  what can you do about it? Well, make sure you're stress testing 7% interest rates
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  on your mortgage. That's the first thing, stress test it. Can you do it? If not, I don't know,
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  offload, refire, just do something. Make the rate call first, meaning go
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  and visit the bank and get a second opinion. Talk to your broker, because
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  you can save 10K over the next couple of years with just a refire. Decide on
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  what you're gonna fix and split, because in Australia, fixed rates only last for four to
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  five years anyway, whereas in America, they last for 30. It's insane, it's amazing. So
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  check out which one you're gonna fix and hold, and which one you're gonna keep variable. You can manage
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  future rate rises with that. Build a buffer yourself. So like what
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  cash buffer do we have? Have we got an offset account? Do we have money in the offset account?
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  It helps. And then manage your spending because you're spending
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  with after-tax dollars and that's probably better put into higher mortgage
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  debt. So look for ways to either increase
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  your income through a raise at work or side
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  hustle. Start earning extra money on the side because you're going to need it. If you're a
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  saver, You'll be able to lock in turn deposit for 6-12 months, but go re-pitch
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  and look for other turn deposits that are 5 and 6. And if it gets to 7, your
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  savers might actually get rewarded for once in the last flippin' 30 years,
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  right? Don't bet on any housing forecasts. I don't think
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  we're going to see housing growth in the next 12 months. I wouldn't be like, oh, I've got a
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  house and it's going to grow. I don't think you've been reading the news if you understand that, if you think that.
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  And don't forget to just look at your bank statements and
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  understand your costs. Just be prepared. I think this whole notion of what to do to get
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  ahead of this is be prepared and understand things and look at things. So
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  will rates rise over 7%? Depends what oil
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  does and depends what inflation does. Depends on what both those
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  things do. They have to see two successive rises inflation to
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  do it. So when that happens, be prepared for it. And you will be
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  prepared because you're looking at buffers and things like that. Okay, so be prepared.
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  Dig your heels in, grit your teeth and just get past this next five to 10 years.
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  Think about this, COVID was seven years
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  ago. Think about that for a second. It does go quick. So just be ready, right? And
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  be ready to, if you're indebted, get unindebted because
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  it's going to get harder. Okay, so I hope that makes sense. If you've enjoyed this,
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  follow me, hit the subscribe button, leave me a comment or a question below in the comments, comment