Banks lift mortgage, savings rates as Reserve Bank increases official interest rate to 3.35 per cent

Banks have moved to pass on the ninth straight rate rise as the RBA acknowledged the “painful squeeze” it was putting households under in the most aggressive hiking period in history.

The Reserve Bank of Australia has lifted interest rates for the ninth straight month from 3.1 per cent to a 10.5-year high of 3.35 per cent, as it warned of more hikes in the months ahead.

It is the latest blow for mortgage holders who could soon see their repayments total $1800 more a month than in May when the RBA first started to lift rates to control surging inflation that rose to a 33-year high in December.

ANZ and NAB are the first major banks to pass on the increase, with both upping variable home loan rates 0.25 percentage points from February 17. ANZ will increase its ANZ Plus savings account from February 14 by the same margin, while NAB is reviewing theirs.

RateCity.com.au analysis showed the average borrower with a 25-year, $500,000 loan wll soon pay $908 a month more than at the start of the hikes in May. The latest hike would see repayments rise $76 per month on that loan value, while borrowers would pay $114 per month more on a $750,000 loan. Repayments on a $1m loan would climb $152 a month to take the total increase since May to $1816.

The latest increase at the RBA’s first meeting of 2023 had now cemented this period as one of the most aggressive cycles in history with 325 basis points worth of hikes since May.

RBA governor Philip Lowe said in a statement on the central bank’s decision that it expected further increases in interest rates will be needed over the months ahead to ensure that inflation returned to the target of 2-3 per cent and high inflation was only “temporary”.

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” Dr Lowe said.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

The current rate cycle started in May 2022 with a 25 bps hike, which was then followed up by four ‘double’ 50bps rates before a pivot to 0.25 percentage point increases at its October, November and December meetings.

Dr Lowe recognised the “painful squeeze” some were facing due to higher rates and the increase in the cost of living, adding that households were also being impacted by a decline in housing prices.

PropTrack on Tuesday said that national property prices were expected to decline between 7 and 10 per cent in 2023 if the Reserve Bank lifted the cash rate by a further 50 basis points including this afternoon’s increase and then paused for the rest of the year.

“As interest rates have risen faster and higher than expected, property prices have fallen, along with sales volumes,” PropTrack director of economic research Cameron Kusher said.

RBA governor Philip Lowe is set to lift the official cash rate to 3.35 per cent at this afternoon’s meeting. Picture: Brent Lewin/Bloomberg via Getty Images

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls.”

City Index senior market analyst Matt Simpson said this rate hike meant the current period was now the most aggressive hiking cycle ever, but was still be less than what other banks had done.

“Their rates remain well below RBNZ’s 4.25 per cent and the Federal Reserve’s 4.75 per cent, which is concerning given both of those central bank started hiking considerably sooner than the RBA, and continue to battle high levels of inflation,” he said.

Westpac, Commonwealth Bank and ANZ expect the cash rate to now peak at 3.85 per cent. Deutsche Bank Australia updated its forecast last week to predict a total of four hikes this year to peak at 4.10 per cent by August.

Mr Simpson said that there was a strong chance that rates would end up above 4 per cent given other countries had continued to hike despite inflation peaking.

“US inflation peaked in July yet the Fed are still hiking, and inflation in Australia has not yet peaked,” he said. “And while the employment situation remains robust and inflation remains high, it’s a green light for the RBA continue hiking.”

RateCity.com.au research director Sally Tindall said borrowers looking to refinance should do so as falling house prices could mean they were ineligible.

“On a half a million-dollar loan, every month you wait to refinance costs you up to $400 a month. That’s the same as buying brand new AirPods every month,” she said.

PropTrack said further interest rate hikes will see property prices fall by up to 10 per cent nationally this year. Picture: Julian Andrews.

“Take action now. As property prices slide, you might find you can’t access the biggest discounts. Worse still, you might find you can’t refinance at all.”

The RBA has used aggressive interest rates to try to pull inflation to within its target band of 2-3 per cent. Inflation in the December quarter was hotter than expected at a 33-year high of 7.8 per cent. The RBA said on Tuesday inflation would decline to 4.75 per cent this year and to around 3 per cent by mid-2025.

Ms Tindall said savers needed to shop around for a better deal with over 40 per cent of banks offering accounts with a rate below 1 per cent.

“Savers should aim for an ongoing savings rate that’s, at the very least, above the current cash rate,” she said.

Ms Tindall said a customer with $50,000 deposited in the ANZ’s Online Saver product would have earned $167 in interest in the past year, but that could have been $1234 more if they moved to bank offering rates above 4.5 per cent.

Originally published as Banks lift mortgage, savings rates as Reserve Bank increases official interest rate to 3.35 per cent