RBA raises interest rates to 0.35% as cost-of-living pressures grow

Many households with a mortgage will see their loan repayments rise after the Reserve Bank of Australia increased the official cash rate for the first time in nearly 12 years.

Article published 03 May 2022

At its May board meeting on Tuesday, the RBA lifted the cash rate by 25 basis points to 0.35% in an attempt to curb surging inflation, which is rising at the fastest pace in two decades.

In his post-meeting statement, RBA governor Philip Lowe said now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place during the pandemic.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Mr Lowe said.

“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

Inflation data released last week showed the Consumer Price Index (CPI) increased by 5.1% over the year to March as the cost of fuel, food and housing surged.

New economic forecasts by the Reserve Bank now predict CPI will reach around 6% annually by the end of the year, significantly higher than its previous forecasts of 3.25%.

Even stripping out some of those big, one-off price movements, underlying inflation – the RBA’s preferred measure of inflation – is now running at 3.7% annually and tipped to reach 4.75% by the end of 2022.

Mr Lowe signalled further interest rate rises were on the way.

“These forecasts are based on an assumption of further increases in interest rates,” he said.

During the course of the pandemic, the RBA has repeatedly said it will not raise the cash rate until inflation is sustainably within its 2-3% target range.

PropTrack economist Paul Ryan said inflation has now proven to be both stronger and broader than the RBA expected.

“By moving today, rather than waiting for further data in June, the RBA is signalling that it will intervene to curb stronger than expected inflationary pressures, despite the ongoing Federal election campaign,” Mr Ryan said.

“While this increase in rates was small, it signals the start of a series of interest rate rises before the end of 2022.”

What it means for borrowers 

When the RBA raises the cash rate, lenders typically pass that on to customers with a variable interest rate home loan.

That could mean another budget hit for many borrowers who are already facing higher grocery, petrol and power bills.

But how much would it actually cost?

Analysis conducted with the Mortgage Choice home loan repayment calculator shows a  0.25% increase in interest rates will have a fairly modest impact – for now.

For a borrower with an average variable mortgage rate of 2.92%, based on February RBA data, that could cost an additional $68 a month on a $500,000 mortgage.

For a $750,000 mortgage, that’s the equivalent of around $102 extra a month, or $135 a month for a million dollar mortgage.

In this calculation the borrower is an owner occupier paying principal and interest with 30 years remaining on their loan. It does not factor in loan fees and charges.

While it may not seem like much, economists expect a series of interest rate hikes in the months ahead will take the cash rate anywhere from 1% to 1.5% by the end of the year, which could cost add hundreds of dollars to the mortgage bill each month.

Here’s a snapshot of how high economists at the big four banks expect interest rates will eventually reach.

Who

Forecast horizon

CBA

1.25% early 2023

ANZ

2.25% May 2023, eventually 3%+

NAB

2.5% 2024

Westpac

2% May 2023

Forecasts current at time of publication on 3 May 2022.

Mortgage Choice National Sales Director David Zammit said today’s decision means lenders will start to increase the pricing on their variable rate home loan products.

“That said, the market remains extremely competitive and banks will be looking to attract customers through initiatives like cash-back offers, making now a great time for first time buyers and borrowers a like to shop around,” Mr Zammit said.

“Borrowers should remember that it follows more than a decade of record-low rates,” he added. “My advice to borrowers would be to speak to your mortgage broker about how the Reserve Bank’s decision will affect you. Borrowers who haven’t had their home loan reviewed in the past year should take this opportunity to ensure you’re still getting a competitive deal.”

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Most borrowers well placed for rate rises

While the increased costs will no doubt add pressure to household budgets, for the most part, borrowers are well placed to manage higher repayments.

Official data shows many households have built up significant savings buffers and paid down their loans ahead of schedule.

According to the Australian Prudential Regulation Authority (APRA), the value of funds in offset accounts reached a record $232 billion in the December quarter.

However the prospect of several interest rate rises in the near term is already hitting property price growth, Mr Ryan said.

“This will weigh on housing price growth, which has clearly slowed in anticipation of these higher borrowing costs,” he said.

“The outlook for housing prices later in the year is one of a balance between higher mortgage rates and the higher income growth the RBA is looking to see.”

The PropTrack Home Price Index showed property prices rose 0.13% nationally in April, the slowest monthly pace of growth since the beginning of the COVID-19 pandemic.

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