The interest rates decision that stopped a nation

The Melbourne Cup Day interest rates decision will erase any winnings many punters might have enjoyed, with the Reserve Bank of Australia (RBA) lifting rates by another 0.25 per cent on Tuesday (7 November).

Michele Bullock, RBA Governor, said inflation was too high for them to ignore and took the official cash rate to 4.25 per cent.

The rate rise marks the end of four months of wait and see from the RBA but is the central bank’s 13th rate rise since May 2022.

While the decision was not unexpected, with three quarters of surveyed experts tipping a rate rise, it will still come as a blow to many borrowers.

A $590,000 mortgage will now equate to roughly $1,345 more per month than was paid in April last year.

Ms Bullock hinted that any future interest rate movements would also be up before they were down, saying the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.

“Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago,” she noted in the monthly Monetary Policy Decision.

“The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly.

“CPI inflation is now expected to be around 3.5 per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.

“The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.”

James Morley, Professor of Macroeconomics at The University of Sydney, said inflation and global geopolitics all pointed to a rise in interest rates, with more possibly to come.

“There are enough components of inflation that surprised on the upside and the RBA will want to ensure longer-term inflation expectations remain anchored at low levels despite another spike in volatile energy prices that is hopefully less persistent than with the war in Ukraine.

“Also, more robust global economic conditions and domestic financial conditions both suggest the risk of recession is receding, thus the RBA has room to raise rates at the next couple of meetings in response to inflationary pressures while still likely achieving a soft landing.

“I suspect that domestic components of inflation will make more progress back towards target before the February meeting and then the RBA will hold unless there are further domestic or global shocks, which there may well be given the geopolitical situation.”

Homes pushed beyond reach of average income earner

For the average Australian income earner on a full-time salary of almost $96,000, as stated by the Australian Bureau of Statistics, even units are now a stretch for the majority of workers.

Finder analysed how much is needed to be earned in a year to comfortably afford a mortgage (taking into account this rate hike).

The data shows the minimum household income required to afford the average Australian house price is $182,000. For units, it’s almost $130,000.

Graham Cooke, head of consumer research at Finder said the prospect of owning a home is dwindling for new buyers trying to get into the market.

“People are looking at stretching themselves financially in order to purchase a property.

“While not impossible, there are a lot of things to consider for those aspiring to own a home.”

There were no shortage of commentators predicting the worst may not be over for mortgagees.

Sean Langcake, Head of Macroeconomic Forecasting, Oxford Economics Australia, said the current strength in core inflation constitutes the type of upside surprise Governor Bullock has said would warrant tighter monetary policy – and more pain for borrowers.

“If the RBA is losing patience and wants to guarantee the return of inflation to target, it is unlikely they will see a 25-basis point move as being enough to get the job done.”

David Robertson, Chief Economist, Bendigo Bank, said the latest CPI data left the RBA board with little choice but to increase the official cash rate again in November.

“Given the acceleration in Q3 inflation, another possible hike to 4.6 per cent in February will then be dependent on Q4 CPI, released on 31 January 2024.”