The RBA has hiked the cash rate again in October, though this time it took the foot of the throttle slightly and hiked by 25 basis points instead of 50, to now sit at 2.6%. Many analysts had been anticipating the full 50 point rise, especially on the back of the latest inflation figures, so the smaller hike may be a consolation for some.
RBA Governor Philip Lowe cited the central bank’s commitment to getting inflation back into its target range of 2-3% as integral to this month’s decision.
“Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead,” Lowe said in a statement. “The cash rate has been 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.
“As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”
If and when will inflation settle?
Lowe said further inflation was expected in the months ahead, before then declining back towards the 2–3% range next year.
“The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates,” Lowe said. “The Bank’s central forecast is for CPI inflation to be around 7.75% over 2022, a little above 4% over 2023 and around 3% over 2024.
Borrower budget blowouts
Even though the hike was less severe, the decision will mean further pain for borrowers, after a recent report showed just how significantly people’s borrowing power has been affected.Even before today’s rate rise, buyers’ borrowing capacities have fallen by nearly 20% since earlier this year. The new 0.25% hike will worsen that to a 21.6% fall, an analysis of PropTrack data revealed.
To put that into context, that would mean a buyer who qualified for a $750,000 loan earlier this year, would now only be able to borrow $587,000. Someone who could have borrowed $500,000, will only get $391,000. Many borrowers who had pre-approvals are now stunned to find out they are no longer anywhere near the sums they could previously borrow.
No relief in sight
Today’s bump in interest rates will see repayments on a $500,000 mortgage increase by $76.45 a month. A $1 million mortgage will cost an extra $152.90 a month.
Banks forecast rates to continue to climb for a while yet, with the big four expecting the cash rate to pass 3% by the end of the year and Westpac tipping it to be as high as 3.6% by February 2023. This could see average variable rates reach close to 6.5%, according to research by Canstar. Canstar’s finance expert, Steve Mickenbecker says borrowers need to adjust to the new world of higher repayments.
“With repayments on a 30-year $500,000 loan up by over $1,000 in less than a year, there is little wonder … Australians are expecting to find the going tough,” said Mickenbecker. “Higher interest rates are a shock to a whole generation of borrowers, but until the Global Financial Crisis and Covid, the cash rate was at 5% or above for 15 of its 19 years. Borrowers will have to get used to dealing with higher interest rates as the norm.”
Take action to stem the bleeding
Mickenbecker said borrowers should not delay in seeking out better deals if possible.
“The bargains are not as generous for refinancers as they were at the start of the year, but the margin between the better rates available and the mediocrity of average rates is just as wide,” he said.
“Refinancing into a lower rate loan will insulate borrowers from the next couple of Reserve Bank cash rate increases, and maintaining repayments at their current level, higher than required on the new loan, will build a buffer for times that are looking likely to get tougher.”