The Reserve Bank has raised its key interest rate for a fifth month in a row to 2.35%, extending Australia’s fastest pace of increases in borrowing costs in almost three decades.
The 50 basis-point rise, decided on Tuesday by the RBA board, lifted the cash rate to the highest since 2015. The increase was in line with the expectations of most economists.
Philip Lowe, the RBA governor, said the central bank “remained committed to returning inflation to the 2–3% range over time. It is seeking to do this while keeping the economy on an even keel.”
In language similar to the August statement, when the bank raised its cash rate by a similar amount, Lowe said the bank’s board “expects to increase interest rates further over the months ahead, but it is not on a pre-set path”.
Assuming the Reserve Bank lifts its cash rate to 2.35% on Tuesday, here's how much more someone on a 25 year mortgage will repay per month (and how much more since rates started to rise in May). (Source: @RateCity ) pic.twitter.com/1fB04kjGCP
— Peter Hannam (@p_hannam) September 5, 2022
The RBA started its rate rise cycle in May during the federal election campaign. The bank was relatively slow to move and likely has more work to do to rein in an inflation rate – already running at its quickest since 2001 – that the bank and Treasury expect will peak at almost 8% by the year’s end.
The path of reducing inflation without stalling the economy was a “narrow one and clouded in uncertainty, not least because of global developments”, Lowe said.
“The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia’s invasion of Ukraine, and the Covid containment measures and other policy challenges in China,” he said.
The Australian Bureau of Statistics will release June quarter GDP growth data on Wednesday. Economists are expecting both quarterly and annual growth rates to come in at around the same as in the March quarter but note that the impact of the higher interest rates are mostly yet to be felt by households and businesses alike.
Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics, said changes in Lowe’s language suggested the RBA may be close to pausing further rate rises.
“While the board has signalled they still expect to take rates higher, today’s statement has dropped references to rate hikes as ‘normalising’ policy’,” Langcake said.
“We expect the pace of interest rate hikes will slow from here,” he said. “With downside risks to growth mounting, the RBA will soon pause to assess the impacts of the very large shock to interest rates they have already put through the household sector.”
Prior to Tuesday’s announcement, investors had been predicting the RBA’s cash rate will keep rising until about mid-2023 when it will reach almost 4%. Commercial economists, though, expect the peak to be more like 3%, with a pause in the monthly rate rises before this year is out.
Ahead of the RBA rates verdict (and accompanying commentary), investors were viewing the likelihood the cash rate would rise 50bp to 2.35% as an 83% chance. They're also predicting rate would peak at about 3.85% by July next year. (Economists think it'll be more like a 3% peak.) pic.twitter.com/nB8r1VnwKX
— Peter Hannam (@p_hannam) September 6, 2022
RateCity, a finance data firm, said the average variable rate borrower would soon be on a rate above 5% following Tuesday’s RBA hike.
If passed on full, the average existing customer variable rate for owner-occupiers would be on 5.11%. Still, about a dozen lenders are likely to offer variable rates under 4%, RateCity said.
Investors, meanwhile, would face average variable rates if an existing customer of 5.46%. Similarly, a dozen or so lenders would be offering investor variable rates under 4.30%.
For those with 25 years to go on a $500,000 mortgage, each half-percentage point increase adds $144 to monthly repayments. Since May the 2.25 percentage point increase in the RBA’s cash rate, if passed on in full, would increase those repayments by $614 a month, RateCity said.
Just over a third of Australian households have a mortgage, with the full impact of each rate rise taking about three months to take effect, the CBA estimates.
Higher borrowing costs also tend to increase rents as investors try to pass on as much of their higher expenses to tenants, economists say.
