RBA’s Surprising Interest Rate Hike Means for Mortgages, Inflation, and the Economy
- The Reserve Bank of Australia (RBA) increased the official cash rate to 3.85% in a surprise move, leading to a cumulative increase of 3.75%, which is the most rapid tightening cycle seen in a generation.
- This decision was made due to the RBA’s concern about inflation being higher than they would like it to be, with a target of returning it back to 3% by mid-2025.
- The increase in interest rates has led to a reduction in borrowing capacity and increased mortgage repayments, impacting the housing market and borrowers.
- Despite the higher borrowing costs, the economy has remained stable, with unemployment at a 50-year low of 3.5% and services inflation at the fastest pace in over two decades in Q1.
- Borrowers can consider fixed-rate mortgages, as some banks have reduced their rates, but caution is needed as rates could change in the future, and fixed rates historically haven’t worked out well for borrowers financially.
The Reserve Bank of Australia (RBA) made a surprise decision to increase the official cash rate by 0.25 percent, taking it to 3.85 percent. This was an unexpected move, as many experts had predicted that there would be no rate increase this month. The cumulative increase in rates since May has reached 3.75 percent, making it the most rapid tightening cycle in a generation.
The decision by the RBA has caught many economists and money market experts off guard, given recent reduced household spending and their rhetoric. Even when 21 out of 30 surveyed economists predicted that the cash rate would be left on hold, the RBA Governor, Philip Lowe, said that there was still a lot to be done with inflation at a higher level than they would like.
The RBA’s aim is to return the target level of inflation back within a reasonable timeframe. They held rates steady in April to assess the economy’s current state of play. However, inflation is forecast to hit 4.5 percent this year alone, and it is expected to return back to the RBA’s target range of 3 percent by mid-2025.
The persistence in service inflation is a real concern, according to Dr. Lowe, and 3.2 million households will be affected by today’s increase. Further increases may also be needed to tame inflation as things further develop. The Governor left everything open, suggesting that there could be more rate hikes in the future.
The shock move by the RBA has many implications, particularly for borrowers, people looking to enter the market, and the Australian economy. Since rate hikes began in May of last year, borrowing power has reduced by nearly 30 percent, directly impacting borrowing capacity and how much individuals have to spend each month in repayments.
For example, a family with two children and a household income of $150,000 has seen their borrowing capacity fall by 24 percent to around $690,000 over the last 12 months. This is due to the rapid tightening cycle and increased interest rates.
Despite higher borrowing costs, unemployment has remained stable at a 50-year low of 3.5 percent in March, and services inflation has accelerated at the fastest pace in over two decades in quarter one. The Reserve Bank has indicated that the economy is still too resilient, even with the higher borrowing costs.
The property market is also a concern for the RBA. The Commonwealth Bank and ANZ Bank recently revised their forecast for the property market, suggesting that Sydney property prices could gain as much as five percent this year, and Melbourne up two percent. This revision comes in light of the activity in the market, with jobless rates remaining low and increased immigration numbers.
However, the RBA is concerned that there may be too much heat in the market, and they are trying to simmer things down to prevent things from moving too fast. They are mindful of the lessons learned from the past, and they want to avoid a repeat of previous property market crashes.
For the average mortgage holder, the rate hikes since May of last year have increased mortgage repayments, with the 3.75 percent increase in the cash rate adding nearly $1,000 to the bottom line for someone with a $500,000 mortgage. Those with a million-dollar mortgage will see an extra $2,177 added to their repayments.
To mitigate the impact of rate hikes, some banks have reduced their fixed rates for one, two, and three-year fixed terms. These rates are similar to current variable rates, offering borrowers stability in their payments for the next 12 to 36 months. However, borrowers need to be cautious about fixing rates too far into the future, as rates can change in the future.
Mortgage brokers can help borrowers understand the pros and cons of fixing
In terms of inflation, Dr. Lowe expressed concern about the persistence in service inflation, stating that it remains a real concern. According to recent forecasts, inflation is expected to hit 4.5% this year alone, which is significantly above the Reserve Bank’s target range of 2-3%. The Reserve Bank aims to return inflation to within a reasonable time frame, with a target of returning to the 2-3% range by mid-2025.
As a result of the interest rate hike, approximately 3.2 million households will be affected. Many borrowers will be impacted by reduced borrowing capacity, and the rapid tightening cycle has directly impacted how much they have to spend each month on mortgage repayments. For example, a family with two children and a household income of $150,000 has seen their borrowing capacity fall by 24%, to around $690,000 over the last 12 months.
Despite the impact on borrowers, the Reserve Bank Governor stated that the Australian economy remains resilient. Unemployment has remained stable at a 50-year low of 3.5% in March, and services inflation has accelerated at the fastest pace in over two decades in quarter one. Headline inflation has also come down from 7.8% in the March quarter to 7% in the last quarter, but it is still significantly higher than the Reserve Bank’s target band.
The recent interest rate hike is expected to have a significant impact on the Australian economy, particularly on the property market. According to recent forecasts, the Sydney property market could gain as much as 5% this year, and Melbourne up to 2%. The Commonwealth Bank and ANZ Bank have revised their forecasts on the property market, as they believe there is still significant demand despite the higher borrowing costs.
The Reserve Bank’s decision to increase interest rates has come as a surprise to many economists and money market experts, given the recent reduced household spending and rhetoric suggesting that there would be no change. However, the Reserve Bank Governor, Philip Lowe, stated that there is still a lot to be done, and the decision to hold rates steady in April was to assess the economy’s current state of play. The Reserve Bank aims to return inflation to within its target range and may need further rate increases to achieve this.
For borrowers, the recent interest rate hike means that they will need to assess their current mortgage repayments and potentially consider fixed rates. Fixed rates have started to come down, with many banks reducing their one, two, and three-year fixed rates. While fixed rates can provide stability, it is important to consider individual circumstances and whether making extra payments is possible. Historically, fixed rates have not always worked out financially for borrowers, but mortgage brokers can help individuals consider the pros and cons of different mortgage structures.
In summary, the Reserve Bank’s recent interest rate hike has had a significant impact on the Australian economy, particularly on borrowers and the property market. The decision to increase rates came as a surprise to many, but the Reserve Bank Governor stated that there is still much to be done to return inflation to within its target range. Borrowers will need to assess their mortgage repayments and consider fixed rates, while the property market is still expected to perform well despite higher borrowing costs.
