The Reserve Bank of Australia (RBA) has hiked the national cash rate for the sixth consecutive month, increasing it to 2.6% on October 4. The announcement gives mortgage holders a slight breath of relief after four straight months of 50 bp spikes. The 25 basis point (bp) rise was also less than was expected with market expectations believing there was a 79% chance of a 50bp spike to 2.85%. Three of the Big 4 Banks also got it wrong with this same forecast.

Rate increase "necessary to bring inflation back down"

The RBA has suggested that 2.5% is its ideal "neutral" rate - one that's "neither stimulatory nor contractionary". However, even a 2.6% cash rate isn't entirely satisfactory, according to RBA governor Dr Phillip Lowe, who warned Australia's inflation was still too high in his October announcement. And while many economic experts and homeowners are hoping for continued rate relief especially as Christmas approaches, Dr Lowe advised further increases would happen in the months ahead until inflation dropped to his gold star figure of 2%-3%. However, the RBA Board's decision to only increase the cash rate by 25bp was in itself a slight measure of hope for homeowners. Dr Lowe certainly acknowledged that the cash rate had 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," he said. As well, 2023-2024 is looking hopeful for both inflation and the cash rate, despite our high inflation which Dr Lowe said is due to both global factors and strong domestic demand that the current economy can't fully meet. "Medium-term inflation expectations remain well anchored, and it is important that this remains the case," he said. Dr Lowe is also very pleased by the solid growth of Australia's economy and especially its 3.5% unemployment rate in August - the lowest rate in 50 years. However, he's not happy with the recent deterioration of the global economy and repeated his September words regarding how to keep the Australian economy on an even keel while still pushing down inflation: "The path to achieving this balance is a narrow one and it is clouded in uncertainty."

"Cash rate target at highest level since July 2013"

CoreLogic head of research, Eliza Owen was definitely concerned about the hike, commenting that 2.6% was the highest cash rate since July 2013 and also surpassed the decade-long average of 2.55% before COVID's onset. "The current rate-tightening cycle is the fastest since the early 1990s," she said. Ms Owen also described the spring selling season as having a "lacklustre start" - and this despite the consecutive rate rises. "New listings across the capital cities trended -12.2% below the previous five-year average," she said. "This suggests there has been little motivation to sell property. "Buyer demand is also tapering off from high levels last year, with estimated sales activity down -11.4% over the year-to-date compared to the same period in 2021." However, Ms Owen added that the national rate of monthly property price decline had eased slightly during September (-1.4%), compared to a -1.6% decline in August, while September had seen a lift in auction clearance rates. She was also pleased by the "good news" that RBA was clearly slowing down its increase rates. "Economic indicators are also showing a slight unwinding in the labour market and steadying inflation," she said. Meanwhile, CoreLogic's October Hedonic Home Value Index showed that every capital city - bar Sydney and Melbourne - as well as every state's regional areas experienced a strong increase in dwelling values, with Adelaide (19.2%) and Brisbane (13.4%) being the leaders on the capital city ladder. CoreLogic’s research director, Tim Lawless advised that while it was too early to suggest the housing market has moved through the worst of a downturn, the initial shock of the interest rate rise may now have "passed through the market". "Most borrowers and prospective home buyers have now ‘priced in’ further rate hikes," he said. "However, if interest rates continue to rise as rapidly as they have since May, we could see the rate of decline in housing values accelerate once again.”

What does this mean for my mortgage?

Ms Owen explained that if today's 2.6% cash rate was passed on to mortgage rates in full, the average, variable mortgage rate for a new owner-occupier loan could rise to around 4.76%. This is up from 2.4% in April. "This scenario makes clear the impact of rising rates on buyer demand, with further mortgage rate rises through October likely to place additional downward pressure on the housing market," Ms Owen said. "But from the CoreLogic perspective, growth in rent values has started to ease, which may be a leading indicator for the trajectory of CPI rents. "And once the cash rate reaches a peak, we may also see a floor in the housing market downturn." The RBA’s next monthly cash rate announcement will be on Tuesday, November 8 (Melbourne Cup Day) at 2.30pm AEDT.