It’s been a long, long time coming but on Tuesday, it finally happened: an increase in Australia’s 18-month-long, 0.1% cash rate to 0.35% and our first interest rate hike in a decade.
The jump of 25 basis points came as a nasty surprise to many with financial market expectations forecasting only a 0.15 point change this month.
The announcement just a few weeks before a federal election was also seen as a spanner in the economy’s financial works.
Australia’s share market slumped 0.5% almost immediately after the Reserve Bank of Australia (RBA)’s afternoon announcement.
“Appropriate” withdrawal of “extraordinary monetary support”
Since the RBA dropped its cash rate to 0.1% in November 2020, after an eight-month setting at 0.25%, RBA governor, Dr Philip Lowe, has determinedly remained cautious about increases.
However, with headline inflation now 5.1% – well beyond the RBA’s 2%-3% target range – Dr Lowe explained it was an appropriately right time to withdraw some of the “extraordinary monetary support” which had assisted the economy during COVID.
“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Dr Lowe said.
“There is also evidence that wages growth is picking up (and) given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”
Dr Lowe said Australia’s economic growth outlook, including unemployment, and household and business balance sheets was positive.
“The central forecast for 2022 is for headline inflation of around 6% and underlying inflation of around 4.75% and by mid-2024, headline and underlying inflation are forecast to moderate to around 3%,” he said.
Dr Lowe added that the country’s labour force participation has increased to a record high while the unemployment rate had declined over recent months to 4%.
It is expected to decline to around 3.5% by early 2023 and remain around this level long-term.
“This would be the lowest rate of unemployment in almost 50 years,” Dr Lowe said.
Good and bad news for already softening property market
The cash rate increase is not a surprise to industry experts and commentators, who have been predicting such a change for months – and Dr Lowe has already predicted future increases in his bid to ensure inflation “returns to target over time”.
CoreLogic research director Tim Lawless said RBA’s spike in interest rates would add further downward pressure to housing growth rates, which were already losing steam as the industry expert’s national monthly Home Value Index (HVI) report this month, released just a day before the cash rate announcement, had noted.
“In the case of Sydney and Melbourne, the trend into negative territory is due to factors including affordability constraints, higher fixed term mortgage rates and lower levels of consumer sentiment,” Mr Lawless said.
He added that any downturn in the housing market would depend on how high and fast rates rise, as well as other factors such as employment.
“A higher cash rate implies higher variable mortgage rates, a reduction in borrowing capacity and tighter serviceability assessments for prospective borrowers,” Mr Lawless said.
“Under a 100 basis point lift in variable mortgage rates, a new borrower in Sydney could be facing a rise in monthly mortgage costs of $486, while under a 200 basis point rise, monthly mortgage costs could be $1,005 higher than current levels.”
However, Mr Lawless explained that the cash rate shift was not all bad news for current mortgage holders.
“As we enter a period of higher interest rates, borrowers are generally well ahead of their mortgage repayments,” he said.
“The recent rise in fixed-term mortgage lending is another factor helping to insulate homeowners from higher interest rates.
We’re here to help
As Mr Lawless recently explained, a cash rate rise doesn’t necessarily mean overnight changes to your mortgage repayments.
However, we encourage you to contact your lender soon to check where your interest rates will trend from here, particularly if you have a fixed rate home loan.
Rest assured, we’re your biggest supporter and 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, June 7 at 2.30pm AEDT.