RBA raising interest rates at breakneck speed, but are we nearing the peak?

The official cash rate has jumped a whopping 175 basis points in less time than it takes to kill a new house plant, but it’s not unprecedented.

The Reserve Bank of Australia raised the official cash rate by another 50 basis points in August, taking it from 0.1% to 1.85% in just four meetings. 

The cash rate has been rising rapidly since May. Picture: Getty

That’s a rapid adjustment for borrowers with a variable home loan at a time when living costs are rising and wages aren’t keeping up – especially for the more-than one million borrowers who had never experienced a rate hike before now.

But while the interest rate hikes have so far been larger and faster than usual, it’s not the most aggressive tightening cycle Australian households have experienced.

A look back on past hiking cycles

The way the RBA goes about setting interest rates changed in the 1990s, when it officially began targeting an inflation range of between 2% and 3%.

Under these modern monetary policy settings, the sharpest hiking cycle took place in 1994 when the RBA lifted the cash rate by a total of 275 basis points over five months. Made up of one increase of 75 basis points in August, followed by 100 basis points (or a full percentage point) in both October and December.

Of course interest rates rose much faster between the late-1980s to 1990, when the cash rate reached a record high of 17.5%.

ANZ senior economist Adelaide Timbrell told Mortgage Choice that while historically this isn’t the fastest pace of increases, it will likely hurt borrowers more.

“Because it is coming from record low interest rates, and almost record high household debt-to-income ratios, it means that every percentage point that the interest rate increases now affects us more in dollar terms than it has in the past,” Ms Timbrell said.

ANZ economists expects the cash rate will reach 3.35% by November, following an eye-watering 325 basis points worth of hikes in just seven months. Under these forecasts, they expect the RBA will deliver another 50 basis point increase in September, October and November.

Westpac is also forecasting one more 50 basis point increase in September, followed by several 25 basis point increases to a peak cash rate of 3.35% in February next year.

Here’s what economists at the big four banks predict for the cash rate:

There have been some hints that the RBA may be preparing to either slow down or pause the rate hikes in the not-so-distant future.

The minutes from the RBA’s August meeting stated the board is “not on a pre-set path” to normalising monetary policy, and said the size and timing of future interest rate increases “will be guided by the incoming data”.

CBA head of Australian economics Gareth Aird said softer-than-expected wages growth data for the June quarter meant the RBA could even taper rate hikes at the next meeting.

“[The wages growth] data adds weight to the case for a smaller than 50 basis point hike, either 40 basis points or 25 basis points,” Mr Aird said.

The Wage Price Index rose 0.7% in the June quarter, taking annual wages growth to 2.6%.

“The RBA is not facing a wage price spiral like is being observed in some other jurisdictions,” Mr Aird said.

“Put another way, the RBA does not have to run hard against wages growth by aggressively hiking the cash rate.”

CBA, Westpac and ANZ expect the RBA will begin cutting interest rates again either in late 2023 or 2024.

Household spending key

Another piece of the data puzzle will be household spending, Ms Timbrell said, and whether consumers start to pull back their purchasing behaviour.

“So far the only potential evidence of that has been one very weak month in the Australian Bureau of Statistics retail sales data in June, where the increase wasn’t as much as what inflation would have been in that month,” Ms Timbrell said.

Weak consumer confidence usually indicates household spending will slow, but so far it’s holding up. Picture: Getty

“So far household spending has kept up really well when we consider how low consumer confidence is and how fast these interest rate rises are coming,” she said.

In the week following the RBA’s latest interest rate hike, where it raised the cash rate by 50 basis points to 1.85%, the ANZ-Roy Morgan Consumer Confidence survey fell to its lowest level since the early stages of the pandemic.

“We are now more pessimistic about the economy than what we were right as covid hit Australia when we were stocking up on toilet paper, and before the government had announced Job Keeper and other fiscal policies, “ Ms Timbrell said.

“So we’re feeling very, very uncertain about the future on average, according to these consumer spending surveys, but still spending money on discretionary items when we actually look at how people are translating that low confidence into their behaviour.” 

How it’s affecting the housing market

As interest rates climb, people’s borrowing capacities falls, which is becoming particularly evident in Australia’s more expensive housing markets.

The latest PropTrack Home Price Index shows national house prices are now down 1.66% from their peak in March.

Economist Paul Ryan said national prices have now fallen for four consecutive months.

“The most expensive markets – Sydney, Melbourne and the ACT – are leading the price falls,” Mr Ryan said.

“Larger mortgages in these regions may mean higher interest rates, and uncertainty about how much higher they will rise, are impacting these regions the most.

“Prices have fallen more than 3% from peak in Sydney and Melbourne. In Sydney price are now only up 2.5% over the past year, while Melbourne is up 2.4% over the same period.”

PropTrack is forecasting further house price falls over the next year, particularly in Sydney and Melbourne.

Who rate hikes hurt the most

All homeowners with a mortgage will feel the impact of rising interest rates – some sooner than others. The latest Census data shows that’s more than a third of Australian households.

Recent borrower may have stretched themselves to get into the hot housing market. Picture: Getty

But not all mortgage holders are being equally impacted, and Judo Bank chief economic advisor, Warren Hogan, said recent first-home buyers are bearing the brunt.

“The pain is going to be felt in first-home buyers. They always are going to be the ones who are taking the most risk, so to speak,” Mr Hogan said.

“What you don’t want to have happen is you just get into the market and suddenly rates go up massively. And if they go up a little bit, well, you should be prepared for that, the bank should speak to you about that when they’re giving you a mortgage.

“But not 3-4% in a year, that’s just outrageous and that will really hurt.”

In October last year, the banking regulator, APRA, increased the minimum interest rate buffer it expects banks to take into account when assessing a new applicant’s loan. Lenders must now apply a buffer of at least 3%, up from 2.5% previously.

This doesn’t necessarily mean recent first-home buyers, who are now dealing with increased mortgage repayments and falling property prices, will default on their mortgage – but it certainly makes it tougher.

Mr Hogan said at the other end of the spectrum are investors with multiple mortgages.

“The other people are the people who have like 3, 4, 5, 6 investment properties,” he said.

“That will eventually start to get expensive, especially if those properties go down in value by 15% or 20%.”