Possibility of interest rate hike enters the conversation

The official cash rate has been paused since the start of 2024, with the RBA deciding to leave it at 4.35 per cent at its April meeting last week.

While Australia's big four banks had been tipping a rate cut from September, they have now moved towards a rate hold, with any rate cuts pushed back to at least the RBA's November board meeting.

United States inflation data, which came in stronger than forecast, last week pushed even more change in that view - with signs the rate cut may not come until 2025 and that the inflation situation might even prompt rate hikes this year.

Rabobank last week updated its forecast for the RBA cash rate to include a 0.25 percentage point rise in August and another in November.

Rabobank senior strategist Benjamin Picton said the change in the agribusiness lender's interest rate forecast was prompted by recent signs the RBA was not on track to return inflation to its below its 3pc target, in its set timeframe.

Mr Picton said, in addition, economic conditions indicated the inflation fight might become more difficult.

March employment figures tightened, with the economy shedding 6600 jobs in the month, pushing the unemployment rate up one percentage point to 3.8pc - but Mr Picton said it was clear the labour market was more resilient than anticipated.

"The path ahead is likely to prove difficult for the RBA as real wages are rising, credit growth is accelerating, business indicators are robust, productivity growth remains weak and inflation is rising in the United States,'' Mr Picton said.

"While this remains the case, we expect it will be difficult to return inflation to 2.5pc with a cash rate in the law 4pc region.''

RBA board formerly met on the first Tuesday of each month, excluding January, but is now scheduled to meet eight times a year, for two days at a time.

The next cash rate announcement is due on Tuesday, June 18.

Further rate hikes will flow onto variable loan borrowers, potentially affecting the housing and farmland property market and household and business spending into 2025.

The farmland market is already starting a new cycle, in the wake of three years of double-digit growth - with Rabobank analyst Vitor Pistois last week telling Farm Weekly a trend of growing equity in farm businesses to enable further farmland investment has stopped.

In their latest Farmland Outlook reports for 2024, Elders and Rural Bank also warned farmland price growth should slow or plateau next year.

The impact of interest rates could be one of the farm inputs farmers will be considering before making further investment decisions.

Ray White Rural director and principal Steve Vaughan said a hold on interest rates was probably on the cards, with the potential for a rise becoming slightly more likely than a few months ago.

"But the WA farming situation is probably more about rainfall at the moment,'' Mr Vaughan said.

"That is probably more of a big problem for farmers than whether the interest rates go up."

Bendigo and Adelaide Bank chief economist David Robertson said the financial market was trending towards a recognition interest rates were going to be a little bit higher for longer.

"That doesn't necessarily mean a rate hike, but it does mean the markets are pushing back when they expect rate cuts from the RBA,'' Mr Robertson said.

"None of that will help with land valuations or residential property valuations in the short run.

"One of the key drivers in residential property prices has simply been lack of supply.

"In that respect where interest rates hit is a secondary issue to whether we are going to get more supply or not."

Mr Roberston said Bendigo Bank, and its subsidiary Rural Bank, had not changed its view that interest rates were on hold until next year - it tips four rate cuts from February next year providing the inflation situation is more benign.

"Where three to six months ago the market was factoring in cuts, we were quite firm in saying we think the cuts will be next year, not this year,'' he said.

"I think the market has moved to where we already were."

Mr Robertson said the inflationary outlook faced risks from overseas in respect to higher oil prices and geo-political tensions and, domestically, due to solid wages growth and Australia's relatively low productivity rate.

"Tight labour markets are feeding through to high unit labour costs which is a risk to inflation,'' he said.

"It will be tough if rates do need to be increased any more.

"There is no question if we had further RBA rate hikes that would place pressure on borrowers and you would expect that to also affect valuations."

Nutrien Harcourts WA real estate manager - west Jon Bahen said the dry season and the loss of confidence in the sheep industry would probably be a bigger influence on the farmland market that interest rate cuts - which farmers would manage along with other rising input costs.

"But here is no doubt you will see that farmland prices are going to plateau,'' Mr Bahen said.

"That means we will probably see more properties on the market, rather than less.

"People will take the money and run.

"And we will probably see more activity from the corporates, which take a longer term view."

Mr Bahen said sale periods will likely increase this year, which will give the corporates more time to compete on land sales and that the banks would take a tougher view on lending.

"That will probably have a more significant impact,'' he said.

"Production is down 40 per cent in WA on the previous year, so there is much less cash around.

"But there still seems to be pretty good interest for all the reliable areas.

"The high level of equity sitting out in the Great Southern means that anything that comes up, they can't not buy it."

Elders State real estate manager Drew Cary said it was clear higher interest rates and increases in the cost of living were causing considerable pain in the community - but he believed rates were set at or about the correct level for the next three to six months.

"If that continues and it has the effect the Reserve Bank is trying to implement, I expect the next movement will be downwards to try to ease some of that pain,'' Mr Cary said.

"If the Federal Government comes out with a constrictive budget (this week) it could be three months.

"If things continue the way they are it could be six months.

"But rates are most likely heading downwards not upwards."

Mr Cary said historically as interest rates rose, the WA property market got stronger.

"Even though interest rates were rising, we continued to have population arriving which caused pressure on an already pretty pressurised system,'' he said.

"The only possible outcome was upward prices.

"At the same time, we had a very large differential between us and the Eastern States - relatively speaking, WA has looked very cheap.

"That is important because a lot of the population that is arriving is from the east moving west - either investors saying the prices are so low and the yields so good that they can't look away, or migrants coming across, who can buy a nice 4x2 home here, pay off the mortgage and get a job straight away.

"The last time prices peaked in Perth, they were on or about parity with Sydney, that hasn't happened yet and hopefully it doesn't happen."

Mr Cary said there was probably a year to two years remaining of land price rises in WA.

"The rate of increase is unlikely to be sustained at the 20pc-plus we are seeing at the moment,'' he said.

"If it does, it is very likely we will have a bust at the end of it.

"It would be better if it slowed down a bit.

"There is a lot of pressure out there."