RBA confirms 2.35 per cent cash rate

The Reserve Bank of Australia (RBA) board has increased the cash rate for the fifth month in a row.

The RBA has continued its run of 50-basis-point (bp) hikes since June, as announced following its September board meeting on 6 September.

As such, the official cash rate is now 2.35 per cent. The last time Australia’s cash rate was at this level was in April 2015.

RBA governor Philip Lowe commented: “The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy. Price stability is a prerequisite for a strong economy and a sustained period of full employment.

“The board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

The RBA noted the economic pressures feeding into its decision, which included the highest inflation rate since the “early 1990s”, which is expected to increase further — as well as global factors.

He added: “An important source of uncertainty continues to be the behaviour of household spending. 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 in most markets after the earlier large increases.

“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 remains higher than it was before the pandemic.

“The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy,” Mr Lowe said.

Economists on the rate hike

Australia’s big four banks had collectively forecast this fourth consecutive 50-bp increase, which is in keeping with the RBA’s ongoing efforts to rein in inflation, which it expects to reach 7.75 per cent.

The market expects the RBA will keep increasing the cash rate each month, at least until inflation reaches its anticipated peak later this year. 

“The Reserve Bank of Australia is not shying away from its goal of bringing inflation back inside the target band, and today further increased the cash rate target,” explained CreditorWatch chief economist, Anneke Thompson. 

She noted that recent retail trade, labour force and business sentiment data all point to continued ‘heat’ in the economy, even though consumer sentiment and house prices continue to weaken. 

“We expect that the RBA will not hit the pause button on cash rate increases until retail trade data starts to better reflect downbeat consumer sentiment,” she said, suggesting this could happen as soon as the December shopping period — which is when mortgage holders would be “really feeling the effects of higher repayments” and higher prices.

“However, increasing the complexity for the RBA is the record-low unemployment rate,” she continued, noting that — coupled with low migration — the labour market is poised to remain tight for some time. 

“The risk is that this encourages continued high consumption, even when sentiment is low, and the RBA is forced to continue to increase the cash rate target. 

“On the flip side, households are finally starting to work through their savings, which could start making more consumers pull back their spending. 

“The question is, ‘Will consumers be spooked enough by their savings falling to reduce their spending, even when job security is so high?’,” Ms Thompson asked.

Tightening cycle flagged

PropTrack senior economist, Eleanor Creagh, also commented on the rate movement, suggesting the RBA board remained “committed to overcoming the challenge of high inflation currently facing the Australian economy”.

“To ensure inflation expectations remain anchored around its 2 to 3 per cent target, the RBA has continued to frontload its hiking cycle,” Ms Creagh said, highlighting that “the fastest rise to the cash rate since 1994 has seen home prices falling across the country”.

“Today’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down,” she suggested.

“The level of interest rates will be a key factor of housing market conditions and the pace and depth of home price falls in the period ahead.”

The PropTrack economist noted that the economy had “entered the tightening cycle with strong momentum” but that even though consumer confidence had fallen sharply, the labour market remained tight, the unemployment rate was at a 48-year low, spending was yet to slow, and business conditions remain strong. 

“These conditions have allowed the RBA to continue raising the target cash rate toward their estimates of the neutral rate (2.5 to 3.5 per cent), whilst monitoring the evolution of household spending as interest rates rise — a key source of ongoing uncertainty,” she said.

Looking forward, Ms Creagh added that “the lagged effect of rate rises” coupled with the large share of variable rate borrowers ahead on repayments (and some borrowers on fixed terms yet to expire), means “many mortgage holders have not yet felt, or are only now beginning to feel, the impact of the initial rises”.

Refinances surge

Online network Property Exchange Australia (PEXA)’s chief economist Julie Toth outlined the clear correlation between 2022’s interest rate rises and mortgage refinancing activity.

“[This] announcement is likely to continue the surge of Australians exploring their refinancing options, as mortgage-holders seek out discounts and cheaper options for their home loans from their existing lender or new sources,” Ms Toth stated.

“Even before this latest cash rate rise, PEXA’s Refinance Index had already hit a record high in the week ending 4 September.

“A clear correlation is evident between this year’s interest rate rises and mortgage refinancing activity, indicating that households are responding directly and proactively.

“For a typical housing mortgage of $500,000, today’s increase of 0.5 per cent will add $2,500 in annual interest payments, or $208 per month,” Ms oth explained.

“The cumulative increase of 2.25 per cent so far this year will have added $11,250 in annual interest payments, or $937 per month in additional interest payments.”

Falling home values could cause more pain

Meanwhile property data and analytics provider CoreLogic research director Tim Lawless said - on the assumption that the rate rise would be passed on to mortgage rates in full - the average variable mortgage rate for a new owner occupier loan is set to rise to around 4.51 per cent, up from 2.41 per cent in April.

“For an existing owner occupier loan, variable mortgage rates will average approximately 4.99 per cent, adding roughly $1,093 per month to principal and interest mortgage repayments on a $750,000 loan compared with April levels.

“A consideration of housing prices isn’t part of the RBA’s mandate, so it’s likely the RBA will be prepared to look through the peripheral noise of falling home values, focusing on inflation and labour market conditions," he said.

“However, the housing sector does play an important role in the broader economy...

“The good news is the RBA believes inflation will find a peak towards the end of the year, implying the cash rate should stabilise as inflation reduces back to 2-3 per cent,” he added.

[Related: Big 4 expect 50-bp increase today]