RBA raises rates again but no double dose this time

The Reserve Bank of Australia (RBA) has raised rates for the sixth month in a row but limited the latest hike to the more traditional 0.25 per cent.

Interest rates graphic with arrow up 0.25% text
The pace of interest rate hikes may have slowed but there are clearly still more ahead. (Image source: Shutterstock.com)

The RBA has surprised most economists by raising interest rates by 0.25 per cent to 2.60 per cent.

It held back from the temptation to unleash another double-sized interest rate hike, instead raising rates for the sixth consecutive month but by the more traditional 25 basis points and not a repeat of the 0.5 per cent of recent months.

Despite its restraint, RBA Governor Philip Lowe made it clear more rate hikes were ahead.

“A further increase in inflation is expected over the months ahead, before inflation then declines back towards the 2–3 per cent range,” Mr Lowe noted in his monthly Monetary Policy Decision.

“The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates.

“The Bank’s central forecast is for CPI inflation to be around 7.75 per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.”

Tuesday’s (4 October) interest rate hike means borrowers with a $500,000 mortgage will be paying almost $9,000 more a year, or $735 per month, in interest compared to six months ago.

Less Christmas cheer

With inflation driving up the cost of living even further, many household budgets are moving into a state of stress.

The head of Australia’s peak body representing finance and mortgage brokers said the RBA could have acted earlier.

“The RBA should have acted 18 months ago,” Mr Peter White, Managing Director of the Finance Brokers Association of Australia (FBAA), said.

“Their lack of action and foresight has resulted in devastation for many Australian families,” Mr White said.

Increase in monthly repayments

Loan size +0.25% October hike Total since pre-RBA hikes
$500,000 $74 $687
$750,000 $110 $1,030
$1 million $147 $1,374

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest with 25 years remaining on the average existing customer variable rate and assuming the hikes are passed on in full.

Following today’s rise, his advice to borrowers who don’t have significant surplus funds is to “think about spending a little less this Christmas and prepare for more rises.”

He warned those thinking about refinancing that lenders look at discretionary spending when they assess creditworthiness, so spending up over the festive season could work against some who try to refinance.

“Be aware that lenders will assess you not at the current rate, but at a rate approximately three per cent higher, as they take future rises into consideration.”

Su-Lin Ong, head of Australian economics at RBC Capital Markets, said the change in tempo from the RBA shifted the rates conversation.

“It sends quite an important signal about the pace of future hikes … when you drop down a gear now, while most of the globe is still doing much larger hikes.

“The discussion now is going to be zero or 25 (basis points) for the next few meetings.”

Recession risk

Mr Lowe said inflation was still likely to increase over the months ahead, reaching around 7.75 per cent by year’s end and then a little over 4 per cent through next year.

Australia recorded an annual inflation rate of 6.8 per cent in August, down from 7 per cent in July, according to the Australian Bureau of Statistics. The RBA says it's aiming to use gradual rate rises to bring inflation down in the 2-3 per cent range next year.

As the RBA tries to tame inflation with higher interest rates, the global threat of recession also looms large due to inflation, energy shortages, and more volatile stock markets.

The United Nations issued a report in the hours before the RBA rate announcement saying that tightening monetary policy is threatening a global recession.

United Nations Conference on Trade and Development (UNCTAD) secretary-general Rebeca Grynspan said there was still time to step back from the edge of recession.

“We have the tools to calm inflation and support all vulnerable groups.

“This is a matter of policy choices and political will but the current course of action is hurting the most vulnerable, especially in developing countries, and risks tipping the world into a global recession.”

But the RBA insists Australia, while not immune to global economic headwinds, was well placed to avoid the worst repercussions.

Consumer confidence has also fallen and housing prices are declining.

- Phili Lowe, Governor, Reserve Bank of Australia

It expects GDP to grow by 3.25 per cent over 2022 and 1.75 per cent over both 2023 and 2024 - lower forecasts than three months ago.

Strong demand for labour is expected to see the unemployment rate, currently at a very low 3.5 per cent, decline to 3.25 per cent in late 2022, also lower than previously forecast.

Mr Lowe said the global outlook was a source of uncertainty but paid more heed to local spending patterns.

“Another (source of uncertainty) is how household spending in Australia responds to the tighter financial conditions,” he said.

“Higher inflation and higher interest rates are 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 after the earlier large increases,” he said, before pointing out the countering influences.

“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 still remains higher than it was before the pandemic.”

Budget blues

With interest rates now at a nine-year high but inflation still tracking upwards, the federal government’s first budget later this month promises to be a defining factor for where rates may head in coming months.

Treasurer Jim Chalmers said Australia will not be immune to a potential global recession, as the international economic outlook continues to worsen.

“The weight of opinion around the world is that the global situation has gotten much worse, even in the last few weeks,” he said.

He has already signalled the budget will be slanted towards restraining spending even after the Treasury reported a smaller-than-expected deficit in the fiscal year ended June 30, as Russia’s war on Ukraine drove up commodity prices and bolstered the nation’s bottom line.

“We expect our inflation challenge to get a bit worse before it gets better, but it will get better,” Chalmers said,

“(We aim to deliver) cost of living relief in a way that provides an economic dividend and doesn’t make the job of the RBA that much harder.”

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