RBA hikes interest rates for sixth consecutive month
The Reserve Bank of Australia (RBA) has lifted the nation’s cash rate target for a sixth consecutive month as the central bank battles to lower spiralling inflation.
Following a meeting of the RBA board today, Australia’s interest rate was lifted by 0.25 per cent or 25 basis points from 2.35 per cent to 2.60 per cent.
For the average borrower with a $500,000 loan, today’s hike represents an extra $74 a month or an eye-watering $687 since rates began increasing in May.
Borrowers with bigger loans – for example $1 million – today’s decision will mean a monthly increase of $147, or an eye-watering $1,374 extra since May.
RBA Governor Philip Lowe said the Board decided to increase rates by a smaller-than-expected 25 basis point jump given the rapid increase in the cash rate over the past six months.
“The Board is committed to returning inflation to the 2–3 per cent range over time. Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead,” Lowe said in his monetary statement.
“The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”
While borrowers were expecting the size of the RBA’s rate hikes to slow, experts say there is little relief in sight for already-stretched household budgets.
“ANZ, NAB and Westpac are forecasting the cash rate to climb over 3 per cent by year’s end, and Westpac is taking it a step further by tipping the cash rate to peak at 3.60 per cent in February,” Canstar finance expert Steve Mickenbecker said.
“This outcome could see the average variable rate skyrocket to 6.48 percent or more than double the rate in April, just before the current rate rising cycle began.”
Mickenbecker said the flow-on effect of rapid consecutive rate rises will heap stress on those who recently bought into the market.
“Higher interest rates are a shock to a whole generation of borrowers, but until the Global Financial Crisis and COVID, the cash rate was at 5 per cent or above for 15 of its 19 years,” he said.
“Borrowers will have to get used to dealing with higher interest rates as the norm.
“Even though inflation remains way above the Reserve Bank’s target, it may still find a case for a conservative pause in cash rate rises.
“Recession is rearing its ugly head overseas, and with wage inflation way below price inflation and interest rate hikes, recent borrowers in particular are going to be under extreme stress.”
Brendan Paul, senior portfolio manager at investment firm Atrium, said Australians are particularly at risk due to the high level of debt held by ordinary households.
“If, as expected, cash rates rise over 4 per cent by May 2023 this will mean mortgage rates of six to seven per cent,” he said.
“Although not as high as in 2008, we now have a lot more debt so the cost of servicing this debt as a percentage of disposable income is as high as it’s been for 30 years.
“It’s also the speed that’s important here. The percentage of household income required to service debt is forecast to jump from circa 15 per cent to 20 per cent in just over six months.
“The US is somewhat insulated from this effect due to most of their mortgages being fixed rate.
“Conversely, in Australia the speed of mortgage rate increases and the larger loan amounts have the potential to cause a significant rise in mortgage default rates.”