‘Ho, Ho ... oh no!’ RBA announces December rate rise

The Reserve Bank of Australia (RBA) has called its eighth consecutive cash-rate increase for 2022, taking the official cash rate to 3.10 per cent on Tuesday (6 December).

The extra 25 basis points (bps) from November’s 2.85 per cent rate was hardly a shock to many economists, with 3.10 per cent - the highest level since 2012 – to stand until the RBA board next meets on Tuesday, 7 February 2023.

Disturbingly for those mortgage holders already struggling with rising repayments – feeling like Mickey Mouse in The Sorcerer’s Apprentice endlessly filling buckets as they try to plug holes in their family’s budget - many economists expect more increases to come next year, too.

The December rate announcement followed May’s 25-bp increase, then 50bp hikes in June, July, August and September before returning to 25-bp hikes in October, November.

Collectively, it means mortgage holders have been hit with an extra 300 bps to their home loans, as the RBA continues its hiking cycle to curb inflation.

Prior to the December rate call, economists from Australia’s big four banks were generally in agreement that it was ‘highly unlikely’ the central bank would pause the rate jumps in the lead-up to the festive season  – and it proved thus. 

Speaking after the decision, RBA governor Philip Lowe explained: " The board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain. Another source of uncertainty is the outlook for the global economy, which has deteriorated. The Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.

"The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that." 

Bank economists ‘on the money’

Even after a marginal decline in reported (‘lagged’) inflation buoyed many that the last cash-rate announcement for 2022 would be a hold, the possibility of a minimum 25 bps rise in December solidified as the board meeting drew near.

Australia and New Zealand banking Group (ANZ) confirmed to Mortgage Business on Monday (5 December) that it saw “the RBA tightening by 25 bps on Tuesday, despite the weak October retail sales and the softer-than-expected October monthly CPI indicator”.

ANZ Research Team members David Plank, Catherine Birch, Felicity Emmett and Adelaide Timbrell explained: “With regard to the monthly price data, RBA deputy governor Bullock has said that it will take time to ‘figure out what is the noise and what is the information’, they cited.

“As we saw last quarter, the softer first monthly CPI of the quarter wasn't a particularly useful predictor for the quarter as a whole.

“A December pause will be considered, but with the RBA not meeting again until February and the recent wages and employment data being robust we expect the cash rate target to be lifted 25 bps to 3.1 per cent.

“It is notable that the market thinks there is a good chance of a pause. “At the timing of writing, the market was pricing,” they explained.

Tweaking the forward guidance

Commonwealth Bank Australia (CBA)’s head of Australian Economics, Gareth Aird, confirmed the big four bank had expected the RBA to raise the cash rate at the December board meeting by 25 bps to 3.10 per cent.

“The risks sits with no change, but we consider that risk to be low (~20%),” he outlined.

“We expect a shift in forward guidance that would see the RBA retain a tightening bias, but also pave the way for a potential pause in the tightening cycle in February 2023.

Mr Aird did outline that the CBA expected the December board meeting to be a discussion about raising the cash rate by 25 bps or leaving policy on hold, and cast doubt on any higher increase.

“We do not anticipate that the board will discuss the case to raise the cash rate by 50 bps.

“Since the November board meeting the economic data has been mixed,” Mr Aird added.

“There is a strong case to leave the cash rate on hold in December given the RBA has already delivered an incredible 275bp of tightening over just seven meetings (six months).

“It takes time for this tightening to impact the demand for goods and services and by extension prices. A further 25-bp hike in December would mean an unprecedented 300 bps of rate hikes over just seven months,” he summarised.

“The RBA is still flying blind to a degree given the last few rate hikes have not yet hit home borrowers from a cash flow perspective.

“There is also a very big expiry of fixed rate home loans over the next year which means monetary policy is operating with a greater than usual lag.

Ultimately though the CBA concluded that it did not “expect the RBA to leave the cash rate on hold in December.

"We assign an 80 per cent probability to a 25-bp rate hike,” Mr Aird stated.

A pause would be ‘too early’

According to National Australia Bank (NBA) Global Markets Research economist Taylor Nugent, he explained: "The RBA has held out that wage and inflation dynamics in Australia are different to other countries, and while that was true over the initial reopening phase, recent data is challenging the assessment that the backdrop is fundamentally more benign.”

“With such risks, we think it is too early for the RBA to consider pausing rate increases, and we expect the RBA to continue in a string of 25-bp increases, lifting rates in December, February and March and taking the cash rate to 3.60 per cent.

“Market pricing of an 80 per cent chance of a 25-bp hike at December and February looks too low,” Mr Nugent outlined.

Confidence in Dec and Feb increases

Westpac Bank chief economist Bill Evans has said the big four bank expected the RBA board would raise the cash rate by 25 bps from 2.85 per cent to 3.1 per cent.

“A further 25 basis point adjustment at the December meeting is likely to have been firmly on the Board’s future agenda when it last met on November 1,” Mr Evans said.

“Recall the added attraction of moving in December is that the next meeting will not be until February 7, providing ample opportunity to assess the cumulative impact of the normalisation process.

“In the minutes to the November meeting the Board discussed increasing the rate by 50 basis points while noting that, ‘interest rates were still fairly low in an historical context.’

“Indeed, the decision to raise the cash rate by only 25 basis points at the November meeting came as a surprise to Westpac given the September quarter Inflation Report printed a 1.8 per cent rise (in underlying terms) for the quarter – well in excess of market forecasts of 1.5 per cent.

“A more worrying aspect of the report showed that “around three quarters of prices in the CPI basket grew faster than 3 per cent in annualised terms in the September quarter” (RBA November SoMP) and the annual growth in the Trimmed Mean reached 6.1 per cent – the strongest outcome since 1990," he said.

[Related: Economists expect 3.10% December cash rate]