Reserve Bank raises interest rates, repayments now up more than 50pc since hikes began

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After keeping rates on hold for the past four meetings, the Reserve Bank has resumed hiking its cash rate target, with a quarter of a percentage point increase taking the benchmark interest rate to 4.35 per cent.

It is the latest in a string of hikes that have taken the cash rate from a record low 0.1 per cent at the start of May 2022 to the highest level since November 2011.

The Reserve Bank’s governor Michele Bullock warned in her post-meeting statement that it may not be the last.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks,” she noted, in what has been interpreted as a more neutral statement on the outlook for rates.

“We do not expect that the RBA will follow up with another rate increase in December,” wrote Westpac chief economist Luci Ellis, who until last month was an assistant governor at the Reserve Bank, analysing Ms Bullock’s statement.

“This reads as the board hoping not to have to raise rates again, but being very willing to do so if things change.”

Many analysts, such as Abhijit Surya from Capital Economics, believe discussion may turn to rate cuts fairly soon.

“We believe the bank’s tightening cycle is over,” he wrote.

“If we’re right that the Australian economy will soon take a turn for the worse, rate cuts could be on the agenda as soon as Q2 [April-June] 2024.”

However, National Australia Bank’s chief economist Alan Oster thinks the RBA will hike rates once more in February, while Deutsche Bank’s Phil O’Donaghoe expects that last rise to come next month, taking the cash rate to 4.6 per cent.

More than $1,200 a month extra on a $500,000 mortgage

The latest increase will add around $76 a month to repayments on a $500,000 home loan, with monthly mortgage costs up more than $1,200, or 52 per cent, on such a loan since the RBA started hiking.

However, RateCity’s Sally Tindall said the average mortgage customer had softened the blows to date by refinancing their loan to get a more competitive rate.

“Our analysis shows the average owner-occupier has knocked more than 2.5 standard RBA hikes off their variable rate, which is fantastic. What’s even better is that as an average, there are likely to be thousands of borrowers who’ve managed to secure themselves a much bigger cut than this,” she noted.

“If you’re an owner-occupier with a good track record of paying down your debt, you should be aiming for a rate under 6 per cent.”

RateCity said it estimated that there would still be about 20 lenders with rates under 6 per cent, even if they passed the latest rate rise on in full.

However, customers who had neither haggle nor refinanced were likely to face an average variable rate of 7.11 per cent after Tuesday’s RBA move.

Rate rise widely expected, not universally supported

The move was widely expected by economists and financial markets, which had priced in roughly a two-thirds chance of rates going up.

In fact, ahead of Tuesday’s meeting, financial markets viewed a rate rise as certain by February, with around a 50 per cent chance of another move higher before the middle of next year.

“If the RBA are worried enough about the inflation outlook to hike rates, we don’t think a single 25-basis-point increase will assuage their concerns,” Sean Langcake from Oxford Economics said.

“The board may opt to wait for the next set of inflation data and raise rates in February, but a strong WPI [wage price index] print next Wednesday will probably be enough to ensure another hike in December.”

However, that is a minority view and financial markets are only pricing in around a one-third chance of that happening.

Others believe this latest rate rise is already a mistake, with KPMG’s chief economist Brendan Rynne arguing the RBA could have afforded to wait another month before deciding whether to raise rates again.

“There are enough market signals to suggest aggregate demand is continuing to decline,” he argued.

“A softness is appearing in the labour market and is only likely to grow over the coming months; retail lending rates are rising due to increasing wholesale funding costs and the immediate impact associated with any cash rate rise is going to be disproportionately felt by the poorest in society — the cohort that are least adding to inflationary pressures in Australia.

“The economy is showing more signs that it is weakening because of past rate rises.”

Credit reporting agency CreditorWatch’s chief economist Anneke Thompson said the latest rate rise would hit already struggling business sectors the hardest, while doing little to lower inflation.

“The grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure, therefore this cash rate rise will have little impact on the prices of rents, fuel, insurance and utilities,” she argued.

“Instead, this rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors.

“Demand in these sectors has already contracted, and higher interest rates will force consumers and potential home builders/renovators to further rethink their future spending decisions.”

More households could fall ‘over the edge’

In her statement, Ms Bullock acknowledged that the burden of rising interest rates was being felt unevenly across the community, which created risks for the economic outlook.

“There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight,” she cautioned.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.”

Mozo’s Rachel Wastell said a survey of more than 2,000 people commissioned by the rate comparison website found 57 per cent would be under financial stress with a mortgage rate of 6 per cent or higher.

“If the 25 basis point rate hike is passed on in full by all providers, this could take the average variable rate across all providers to 6.87 per cent, and the big four average variable rate to 7.46 per cent,” she observed.

“The data suggests that mortgage holders paying rates starting with six are already under stress, so if the banks hike rates by another quarter of a percentage point, this could push them over the edge.”

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By business reporter Michael Janda (Original ABC Article)