Mortgage holders are preparing for seven-year high repayments with the Reserve Bank of Australia (RBA) hiking the national cash rate yet again today to 2.35%.
Few people were surprised by the 50 basis point surge, coming as it does after four consecutive monthly hikes.
Since May's 0.35% change, the cash rate has gone from 0.85%in June and 1.35% in July to 1.85% in August.
Amidst the latest rate hikes, comes the return to full petrol excises and the halving of COVID government payments this month, as well as continuing energy crisis and high cost of living dramas.
Inflation path "narrow and clouded in uncertainty"
As he has been for months, RBA governor Dr Philip Lowe remains determined to return inflation to the 2–3% range.
Hence, the recent cash rate hikes which will hopefully subdue buyers a little without seeing the country head into a recession.
Dr Lowe insisted that he was keen to "keep the economy on an even keel" but at the same time, he admitted that achieving his gold star inflation rate was difficult.
"The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments," he explained.
Dr Lowe added that domestic factors are also playing a role in the expected increase of inflation in the next few months.
"There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy," he said.
However, he is encouraged by the continuing solid growth of Australia's economy as well as an upward trend in unemployment figures, which declined in July to their lowest rate in almost 50 years (3.4%).
Dr Lowe said he is aware that higher inflation and higher interest rates are putting pressure on household budgets, with consumer confidence.
As well, the full effects of these rates have still not been fully felt in mortgage repayments.
Nevertheless, he warned that the RBA would continue to increase rates in the months ahead although admittedly "it is not on a pre-set path."
"Rates will not rise to nosebleed levels"
However, even as far back as May, when interest rates started their rolling hike, AMP chief economist Shane Oliver was confident the central bank would only raise rates "as far as necessary to cool inflation."
He based this confidence on households now being more sensitive to higher rates which meant that to cool inflation, the RBA wouldn't need to raise rates as much as it had in the past.
"The RBA won’t be on autopilot, mindlessly hiking and crashing house prices and the economy in the process," Mr Oliver said.
"Rather, after a few initial hikes, it will likely pause to see what happens before doing more, but rates will not rise to nosebleed levels."
Meanwhile, CoreLogic research director Tim Lawless commented that higher interest rates would most likely lead to less housing activity as borrowing capacity diminished.
As well, Mr Lawless believes sentiment will continue to remain low which would placed further downward pressure on housing prices.
He said the last four months of interest rate spikes had already "dented" housing demand,
"CoreLogic’s estimate of national home sales over the three months to August was tracking 14.8% lower than the same period a year ago," he said.
"As we move into spring, there is good chance buyer demand will continue to taper as interest rates rise, leading to higher advertised inventory levels amid more challenging selling conditions."
What does this mean for my mortgage?
Mr Lawless said that if lenders passed on today's cash rate rise in full to mortgage holders, the average, variable mortgage rate for a new owner-occupier loan could rise to around 4.51%.
This is up from 2.41% in April, he explained.
"For an existing, owner-occupier loan, variable mortgage rates will average approximately 4.99%," he said.
"This would add roughly $1,093 per month to principal and interest mortgage repayments on a $750,000 loan, compared with April levels."
What’s next following the cash rate rise?
Mr Lawless said the second half of 2023 or into 2024 may see the cash rate "retrace" some of the hikes experienced this year - and financial markets are already planning for this.
"This is the trajectory that financial markets are now pricing in, with the ASX cash rate futures indicating a peak in the cash rate at 3.9% by July/August of next year," he explained.
"This is followed by an easing back to 3.7% by the end of 2023.
"And as the cash rate finds a ceiling, that will probably be the cue for housing values to find a floor."
Mr Oliver has also forecast that RBA's clear plan of "moving earlier and faster initially" will enable rate hikes to slow down in 2023.
Also helping hikes to slow will be fixed-rate borrowers seeing their interest rates double as their terms end, along with home prices exerting a negative wealth effect, he said.
No recession in sight
Finally, Mr Oliver also doesn't forecast the doom and gloom of many in the market who are forecasting dramatic price drops or even a recession.
This is especially the case after the four "rate-tightening cycles" in 1994, 1999-2000, 2002-2008 and 2009-2010 saw no recession come to pass, he said.
"While rate hikes will cause bouts of uncertainty and see economic growth slow down to around 2.5% next year from 4.5% this year, we don’t see RBA rate hikes this year as being enough to end the economic recovery and trigger a recession," Mr Oliver explained.
In the immediate future however is the Federal Budget on October 25 while Christmas is also just four months away.
