RBA delivers sixth consecutive interest rate hike

The Reserve Bank of Australia has taken its foot off the accelerator in October as it monitors the impact of rate hikes on borrowers. 

The RBA increased the official cash rate by 25 basis points to 2.6% on Tuesday, the highest level since 2013.  

Economists and financial markets had expected a larger 50 basis point increase.  

However, RBA governor Philip Lowe warned it doesn’t mark the end of the rate hikes, with further increases “likely to be required” over the period ahead. 

“The cash rate has been increased substantially in a short period of time. Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” Mr Lowe said in his post-meeting statement. 

“[The board] 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.”  

Inflation is running well ahead of the RBA’s 2-3% target range, with consumer prices surging 6.1% over the year to June. RBA forecasts see inflation reaching 7.75% by the end of the year. 

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Mr Lowe said. 

PropTrack senior economist Eleanor Creagh said this is not expected to be the last rate hike, but merely a step down to a more measured pace. 

“Whilst inflation expectations have risen the lift has been moderate in comparison to other countries,” Ms Creagh said. 

“In combination with wage pressures that remain more modest in Australia, the board have been able to begin to ease off the gas with respect to their tightening cycle. 

“These conditions have given the RBA some room to slow the pace of their tightening cycle. The RBA have exercised this today and returned to the business as usual 25bp increase.” 

Still, the cash rate has risen from 0.1% to 2.6% in just six meetings, the fastest pace of rate hikes in almost three decades. 

As a result of the rate hikes, Ms Creagh said home prices were falling across the country, with prices nationally now sitting 3.35% below their March peak according to the latest PropTrack Home Price Index. 

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

“However, the depth of the downturn will be offset by tight rental markets and rental price pressures, low unemployment, constrained housing supply and rebounding foreign migration.” 

It comes as new lending data by the Australian Bureau of Statistics showed the average size of a new owner-occupier home loan fell in August to $589,000, down from $609,000 in July. 

“In the period ahead the level of interest rates will be a key determinant of housing market conditions and the pace and depth of home price falls,” Ms Creagh said. 
  

Refinancing activity ramps up 

The rapid pace of rate rises has driven a refinancing boom, ABS data shows, with a record $18.9 billion worth of home loans switched to a different lender in August – almost 10% higher than a year ago. 

Mortgage Choice chief executive Anthony Waldron said six cash rate increases in as many months has meant a serious period of adjustment for many Australians. 

“The Board’s decision to raise the cash rate once again will not come as welcome news to borrowers who have seen the cash rate rise six times in as many months, but an increase of 25 basis points will be a smaller hit for those already with mortgages and others hoping to enter the property market in the coming months,” Mr Waldron said. 

“Our brokers’ customers are already taking action on increased repayments, with many seeking better deals on their home loans and adjusting their household budgets.”  

New lending, however, fell for a third straight month in August. 

ABS head of finance and wealth, Katherine Keenan said the value of both owner-occupier and investor loans weakened during the month, although remains elevated compared to pre-pandemic levels.  

“Owner occupier loans in August were 36% higher than February 2020, while investor loans were 70% higher,” she said.  

Mr Waldron said the RBA’s decision to slow the pace of tightening is great news for households, although the hiking cycle is not over yet. 

“I don’t think we’ve seen the end of rate rises yet,” he said. 

“I urge anyone hoping to buy this Spring, or any borrowers seeking a better deal on their home loan, to meet with their mortgage broker so they can put their best foot forward.”  

First published on Tuesday 4 October, 2022.