For the second time in as many months, the Reserve Bank of Australia (RBA) has hiked the national cash rate by 50 base points (bps) to 1.35%.
This is the steepest and fastest RBA cash rate increase since 1994.
Today’s back-to-back 50bps RBA cash rate announcement was an unsurprising, but still stinging, move, for a country already grappling with the third month running of hefty cash rate increases, along with high cost of living figures and an energy crisis.
As well, more extreme weather in Sydney in the past few days has seen crucial vegetable crops ruined, resulting in even higher vegetable prices to come.
” RBA is committed to doing what is necessary”
But for RBA governor Dr Philip Lowe, the tough triple rate rise is one of many such increases that must be made before Christmas – and possibly into next year – to flatten the country’s current 5.1% inflation level.
He said such increases were needed to “normalise monetary conditions in Australia” with the RBA board “committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
While well above the RBA cash rate aim of 2%-3%, Dr Lowe admitted Australia’s inflation figure was not as high as that of many other countries.
“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role,” Dr Lowe said.
“Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices and the NSW floods are also affecting some prices.”
How much and how fast will interest rates rise?
Today’s RBA cash rate announcement lifted few industry expert eyebrows with predictions of a 25bps-50bps jump forecast well before the RBA’s latest hike.
Yet with fixed-rate loans already soaring in the past year along with variable loans, mortgage holders can expect an even nastier uplift in their lender repayments as of today.
CoreLogic research director, Tim Lawless said mortgage holders with a $500,000 housing debt on a variable rate mortgage were paying an extra $366 per month since rates started rising in May,
And if lenders pass on today’s rate hike in full – which is likely – new owner-occupiers will pay 3.66% (up from 2.41% in April) for an average variable mortgage rate.
However, Mr Lawless admitted that the additional repayment cost for these latter borrowers varied significantly across capital cities.
“Today’s 50 basis point rise implies a new borrower in Sydney would be facing an extra $600 per month since April,” he explained.
“But in Perth, where housing values are substantially lower, a recent borrower would be looking at a $507 per month increase in repayments.”
However, what is the same across Australia is the “tightening pincer movement” currently being felt by almost all households and now emphasised by RBA’s 50bps move today, Mr Lawless explained.
He added that while RBA is aware of these issues, inflation would likely remain “stubbornly high” for some time to come so new and current mortgage holders should prepare for further interest rises this year and into 2023.
Yet Mr Lawless said the long-term future for the real estate market could well be “orderly”, with the trajectory of home values depending on how fast and how high interest rates move, along with the broader Australian economy, labour markets and demographic trends.
“A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly,” Mr Lawless said.
We’re here to help
We encourage you to contact your lender soon to check where your interest rates will trend from here, particularly if you have a variable rate home loan.
We can find you the best possible deals from more than 40 of Australia’s biggest banks and specialist lenders so give us a call today at Lending Loop.
The RBA’s next monthly cash rate announcement will be on Tuesday, August 2 at 2.30pm AEDT.