Add Category
The Reserve Bank has raised interest rates for the ninth meeting in a row, taking the cash rate target to its highest level since September 2012.
Key points:
- The RBA's cash rate target is now at 3.35 per cent
- That is the highest level of the cash rate since September 2012
- The RBA governor indicates that further rate rises are expected
The 0.25 of a percentage point increase at Tuesday's RBA board meeting leaves the benchmark rate at 3.35 per cent, with average variable mortgage rates now topping 6 per cent.
The increase adds a further $114 a month to repayments on a $750,000 home loan, taking the total increase in mortgage costs to $1,362 a month for such a borrower since rates started rising in May last year.
The extreme speed with which the RBA has raised rates is highlighted in this graph.
The worse news for indebted home owners is that there appears to remain no end in sight to the Reserve Bank's cycle of rate rises.
"The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary," RBA governor Philip Lowe noted in his post-meeting statement.
"In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and 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."
However, Mr Lowe did also add that the RBA's board was well aware that many households were already struggling with rising mortgage repayments.
"Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living," he observed.
"Household balance sheets are also being affected by the decline in housing prices."
The RBA boss said uncertainties about how much and how soon Australian households would cut their spending in response to rising interest rates meant there "are a range of potential scenarios for the Australian economy", while "the path to achieving a soft landing remains a narrow one".
Economists upgrade peak rates forecasts
More than the widely expected rate rise, Mr Lowe's post-meeting statement has prompted many analysts to upgrade their forecasts for the likely cash rate peak.
Financial markets are now pricing in a greater than 90 per cent chance that the Reserve Bank will lift rates again next month.
Analysts who had previously expected the RBA to stop raising rates at 3.1 or 3.35 per cent have also raised their expected peaks.
CBA's head of Australian economics Gareth Aird is one of them, although he still thinks the Reserve Bank is making another major policy mistake.
"The key point is that rapid interest rate hikes in 2022 will impact demand for goods and services in the economy and by extension price changes in 2023 and 2024. Monetary policy tightening did not impact price outcomes in 2022," he argued.
"But our job is to call what we think the RBA will do and not what we think they should do. As such, we now expect the RBA Board to raise the cash rate by a further 25 basis points at both the March and April Board meetings. This would take the cash rate to 3.85 per cent.
"Two further 25 basis point interest rate hikes means the probability of a soft landing for the economy is lowered significantly. The budgets of many home borrowers will be under considerable strain over the coming year.
"We think policy easing will be required in the fourth quarter of 2023 if Australia is to avoid a hard landing. We continue to expect 50 basis points of rate cuts in the fourth quarter of 2023 and a further 50 basis points of easing in the first half of 2024."
Borrowers face 'great anxiety'
In the Western Sydney suburb of Pendle Hill, mortgage broker Sashi Sen is seeing a rush of clients — not seeking new loans, but to refinance their existing ones for a better deal.
"If they even get 0.1 [percentage points] cheaper, they are moving. They're not staying with the current banks," she observed.
Myriam Borg is one of her customers, and said she has become much less "relaxed" about her household spending.
"Suddenly you're watching for where you can actually be adding more into your home loan," she told The Business.
"I'm watching it with great anxiety, to be honest. And I think with myself, and I'm assuming a lot of home owners, they would be feeling really anxious because it's the unknown, and you don't know whether it's going to keep on escalating."
And Ms Sen said she is seeing a lot more of her clients cutting back their spending.
"Customers were not doing that before — they're putting their expenses on the spreadsheet, and they're looking at it and they're making life changes," she said.
"Some of them are saying that, 'Sashi I cannot have a healthy meal, because healthy meals cost a lot of money, I pay my mortgage first'."
Treasurer Jim Chalmers acknowledged that many Australians were struggling amid high inflation and surging interest rates.
"Each of these interest rate rises, which began before the election, have put extra pressure on Australians and have put extra pressure on the Australian economy as well," he told Question Time.
Shadow Treasurer Angus Taylor said the government should be doing more to help struggling households.
"This is a scary time for so many Australians, and what makes it even scarier is we heard today from the [RBA] governor there are multiple increases yet to come," he said.
"Given all of that, what we want to see is a government that treats this issue — rising cost of living, rising inflation, rising interest rates — as its absolute top priority."