RBA supersizes its interest rates order

The Reserve Bank of Australia (RBA) has imposed a supersized interest rate hike on borrowers.

It lifted the cash rate target by 50 basis points to 85 basis points (0.85 per cent), surprising the market with a rate rise double that expected by most commentators.

The RBA’s dramatic move on Tuesday (7 June) was made in response to ballooning inflation that it sees worsening unless the period of historically lower interest rates is put to an abrupt end.

It’s the biggest one-month increase in the official cash rate since February 2000 and only the second rise since November 2010.

Westpac became the first of the big four banks to announce it will pass the RBA cash rate hike on in full to its variable rate home loan customers, with Commonwealth Bank, ANZ and National Australia Bank moving soon after. The banks did not act so quickly when it came to deposits, with almost no changes to savings rates announced as yet.

“Inflation in Australia has increased significantly (and) while inflation is lower than in most other advanced economies, it is higher than earlier expected,” RBA Governor Philip Lowe said in his monthly Monetary Policy Decision.

“Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation but domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices.

Mr Lowe noted that the floods earlier this year have also affected some prices.

“Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.

“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.”

He made no mention of the contribution to inflation made by the quantitative easing, or money printing, program that the RBA undertook as it followed the lead of the US Federal Reserve, pumping money into the financial system in response to the demand shock from virus-induced lockdowns.

Variable mortgage rates will rise by the same amount as the rate rise over the coming week, taking the average variable interest rate for a new owner occupier loan to around 3.16 per cent. Together with the 25 basis point increase handed down last month, the cumulative 75 basis point lift in mortgage rates will add approximately $200 per month in additional repayments on a $500,000 mortgage compared with mortgage rates in April.

Treasurer Jim Chalmers said the RBA’s move would be hard news for mortgage holders.

“It’s difficult news for homeowners already facing skyrocketing costs of living, including spiking energy prices,” he said.

“A better future awaits but first we have to navigate together this inflation challenge we inherited, and the rising interest rates that accompany it.”

Downside risk for housing

CoreLogic Research Director Tim Lawless said the double whammy for indebted households comes as non-discretionary inflation rises at more than twice the pace of prices for discretionary goods. 

“Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living.”

For housing markets, higher mortgage rates add further downside risk to values, which are already trending lower, such as the case in Sydney and Melbourne, or losing steam in the rate of growth across most other markets. 

“Importantly, home values were already easing well ahead of a rising cash rate and a combination of higher fixed mortgage rates, lower consumer sentiment, tighter credit conditions and worsening affordability have all played a role in the slowdown to-date,” Mr Lawless said.

“While we expect the housing downturn evident in Sydney and Melbourne will gradually spread to other regions, the trajectory for this will depend on how fast and how high interest rates move and normalise, along with the performance of the broader Australian economy and labour market. 

“A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly.”

Wages stalled

With wages not even pretending to keep up with rampant inflation, house purchases will be lower on many prospective buyers’ priority list.

In the 12 months to March 2022, the Consumer Price Index increased by 5.1 per cent, while the Wage Price Index increased by 2.4 per cent, a lag that is expected to continue.

A Finder nationally representative survey of 688 workers found close to 3 in 4 workers (71 per cent) feel they are underpaid.

Graham Cooke, head of consumer research at Finder, said many Aussie workers were banking on a pay bump as a buffer against inflation.

“Australians are already feeling the cost-of-living crunch and are looking to their employers for some relief. 

“While unemployment is now very low and companies are competing fiercely for top talent, economists almost unanimously agree that wage growth won’t keep pace with skyrocketing inflation,” Mr Cooke said. 

Harry Murphy Cruise from Moody’s Analytics said inflation would continue to outpace wage growth, but only in the short term.

“Given the number of workers on collective bargaining agreements, Aussies’ wages tend to move more slowly than in other parts of the world. In the short term, prices will continue to outpace wages, although we can expect that to flip as supply constraints ease and wages play catch-up,” Murphy Cruise said.