RBA raises interest rates by 0.25% but then signals there may only be one more increase to come

The RBA has raised interest rates by another 0.25 per cent as expected, but the wording of its announcement suggests there may only be one more increase in store.

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Repayments on half a million dollars of borrowing will be about $1000 a month higher than this time in 2022 after the Reserve Bank of Australia raised interest rates for the tenth time since May.

The RBA’s latest 0.25 per cent hike, announced on Tuesday, takes the benchmark cash rate to 3.6 per cent. It was at 0.1 per cent in April 2022.

The rise was not a surprise, with 27 out of 27 economists surveyed by Bloomberg tipping a quarter-point jump.

If passed on by lenders, the increase will add $77 to monthly repayments of a $500,000 loan and twice that for $1 million of borrowing.

This is the RBA’s tenth hike in ten meetings since May last year as it struggles to slow runaway inflation.

Prior to this extraordinary run, it had never raised more than three meetings in a row.

Its most rapid tightening had been six increases in seven meetings during 2009 and 2010, in the aftermath of the global financial crisis.

Including today’s move, the run of rises adds about $980 to repayments of half a million dollars and $1960 to instalments on an initial debt of $1m, as many variable home loan rates approach 6 per cent.

For savers, leading accounts are likely to be lifted towards 5 per cent within days.

Significantly, in a statement announcing the new increase, RBA Governor Philip Lowe did not talk about future monetary policy action in the plural, as he had last month.

In revealing February’s 0.25 per cent hike, Mr Lowe said: “The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

But today he said: “The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.”

The latest rise comes as homeowners are being denied the chance to save thousands of dollars a year by refinancing to a lower interest rate because the official test of their ability to repay no longer makes sense, one of the nation’s largest mortgage brokers has warned.

Under rules imposed by the Australian Prudential Regulation Authority (APRA), a lender has to add three per cent to the rate on offer then determine if a would-be borrower would still be able to make repayments.

A year ago, when home loan rates were as low as two per cent, the serviceability test applied to a new borrower was barely five per cent.

Now those seeking a mortgage are being tested against a rate of more than eight per cent – a level unseen in Australia since 2008.

David Hyman says it’s time to revise the serviceability test. Jane Dempster/The Australian

APRA’s rule is stopping many homeowners currently paying upwards of 5.5 per cent interest from switching to another lender offering a rate 0.5-0.6 per cent cheaper.

Neutralising two of the 10 rate rises since May last year would save a borrower repaying $1 million more than $2000 a year.

David Hyman, CEO of Lendi, which also operates Aussie Home Loans, told The Daily Telegraph it was time to revise the serviceability test.

While the three per cent buffer was still appropriate for first-time purchasers, who lack equity and a history of successfully serving a loan, it wasn’t right for people seeking to switch to a less expensive loan, Mr Hyman said.

“Refinancing is a different set of circumstances, and a one-size-fits-all serviceability buffer could be disadvantaging those with existing home equity, who are simply trying to get a better rate,” he said.

“More consideration towards homeowners who are undertaking a simple refinance to a better rate, with existing equity and a good borrowing history … could address those households in danger of falling into a mortgage prison” where they are unable to leave their lender or loan.

Last week APRA said it had no intention of changing the test.

APRA chairman John Lonsdale said “we believe our current macro-prudential policy settings remain appropriate. In particular APRA’s view is that the 3 per cent level remains prudent given the potential for further interest rate rises, high inflation and risks in the labour market.”

Until July 2019, APRA’s serviceability test had a minimum interest rate of seven per cent.

Mortgage Choice Dee Why broker James Algar said authorities had to find “room for a conversation” about easing the test on refinances.

“These are people who are already making those repayments and typically they can’t borrow that same amount of money from another institution to bring the rate down,” Mr Algar said.

Originally published as RBA raises interest rates by 0.25% but then signals there may only be one more increase to come