Another interest rate double hike from aggressive RBA

The Reserve Bank of Australia has hit homeowners with a fifth consecutive monthly interest rate hike, again unloading with a 50 basis point (0.5 per cent) hike that will stretch millions of household budgets.

In announcing its decision the RBA Board made it clear that the new official cash rate of 2.35 per cent is set to rise further before the year is out.

“The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path,” the statement by Philip Lowe, Governor, Reserve Bank, noted.

“The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.

The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

The cash rate setting is now at the highest level since January 2015, but still slightly below the pre-COVID decade average of 2.56 per cent.

Property impact

This rise is highly likely to be passed on in full to household mortgage holders.

Housing markets have reacted negatively to the rate hiking cycle, with capital city housing values down 4.5 per cent since peaking shortly after the first lift in the cash rate on 5 May.

It is reasonable to expect higher interest rates will flow through to less housing activity as borrowing capacity diminishes and sentiment remains low, placing further downwards pressure on housing prices.

CoreLogic’s estimate of national home sales over the three months to August was tracking 14.8 per cent lower than the same period a year ago, highlighting that housing demand has already been dented by the recent cycle of rate hikes.

“As we move into spring, there is good chance buyer demand will continue to taper as interest rates rise, leading to higher advertised inventory levels amid more challenging selling conditions,” CoreLogic Research Director, Tim Lawless, said.

RateCity.com.au analysis shows the impact this hike will have once it is passed on by lenders:

Owner-occupiers:

• 5.11 per cent will be the average existing customer variable rate for owner-occupiers.
• Under 4 per cent will be a competitive variable rate for owner-occupiers paying principal and interest.
• About a dozen lenders are likely to have variable rates under 4 per cent.

Investors:

• 5.46 per cent will be the average existing customer variable rate for investors.
• Under 4.30 per cent will be a competitive variable rate for investors paying principal and interest.
• About a dozen lenders will have investor variable rates under 4.30 per cent.

For a typical housing mortgage of $500,000, Tuesday’s (6 September) increase will add $2,500 in annual interest payments, or $208 per month. The cumulative increase of 2.25 per cent so far this year will have added $11,250 in annual interest payments, or $937 per month in additional interest payments.

Steve Douglas, Executive Chairman, SMATS Group, labelled the supersized interest rate hike as extremely disappointing and unnecessary.

“Given we have had quick and significant rises already, I believe a wait and see impact position would have been a more sensible option given current environment. 

“That said, the base rate still remains historically low, and hopefully many have taken advantage of the low fixed rates that were on offer during the past two years.

“Some level of sensibility is now required, so hopefully rate rises take a pause for a while and allow the economy to settle,” Mr Douglas said.

Julie Toth, Chief Economist of online property exchange network PEXA, said the RBA move reflects elevated inflation pressures in Australia and globally, supply shortages across the construction industry and in other key sectors, and an extremely tight labour market.

“Australia is experiencing historically low unemployment and underemployment rates and – for the first time recorded – fewer unemployed people than advertised job vacancies nationally.

“Today’s announcement is likely to continue the surge of Australians exploring their refinancing options, as mortgage-holders seek out discounts and cheaper options for their home loans from their existing lender or new sources,” Ms Toth said.

Not their problem

A consideration of housing prices isn’t part of the RBA’s mandate, which has made it clear it is prepared to look through the peripheral noise of falling home values, focusing on inflation and labour market conditions.

“Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead,” Mr Lowe said on Tuesday (6 September).

“Global factors explain much of the increase in inflation, but domestic factors are also playing a role.

“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.”

Mr Lowe acknowledged higher inflation and interest rates were putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments.

“Consumer confidence has also fallen and housing prices are declining in most markets after the earlier large increases (but) working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages.

“Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic.

“The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”