RBA raises rates to 3.10 per cent in a blow to households ahead of Christmas

The big four banks have wasted no time in passing on the Reserve Bank’s eighth straight rate hike onto mortgage holders, who will now pay $1000 a month more than in April.

The Reserve Bank of Australia has lifted official cash rate by a further 25 basis points to a 12-year high of 3.1 per cent, in another blow to households ahead of Christmas.

It is the eighth straight hike since the RBA commenced its tightening policy in May and fastest increase on record, as it battles to drive inflation down without sinking the economy.

A quarter-point increase adds $113 to the monthly interest bill on a $750,000 mortgage, bringing the full increase in repayments since the RBA began hiking in May to $1251, according to RateCity.

Westpac was the first to pass on the entire hike onto customers with a variable home loan from December 20. It has also increased its Westpac Life savings rate by 0.25 percentage points and 0.35 percentage points for its Spend&Save offer.

The standard variable NAB home loan interest rate will increase by 0.25 percentage points from December 16, while savings rates were under review. ANZ will lift variable rates from December 16 by the full amount and had yet to move with savings rates.

RBA governor Philip Lowe said in a statement that the board expected to increase interest rates further over the period ahead, but it is not on a preset course.

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour,” Dr Lowe said.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.” “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Commonwealth Bank have revised its forecast for interest rates to now peak at 3.35 per cent in February before 50bps worth of cuts later in the year. ANZ expected the cash rate to hit 3.85 per cent by May.

If this happens analysis from RateCity.com.au shows the average borrower, with a $500,000 debt at the start of the hikes, could see their monthly repayments rise to an estimated $3,393 by May next year. This would be a total increase of $1,058 a month – or 45 per cent – since the start of the rate hikes.

PropTrack senior economist Eleanor Creagh said the latest interest rate rise would increase borrowing costs and reduce maximum borrowing capacities, with borrowing capacities down by more than 20 per cent since May.

“It will take time for higher interest rates to fully affect home prices, so prices are likely to continue to fall as interest rates continue to rise,” she said.

“However, if interest rates peak in 2023, price falls are likely to ease, with values stabilising as interest rate uncertainty reduces.

Further rates hikes is set to drag property prices lower.

Ms Creagh said downward pressure from rate rises will be countered by positive demand from tight rental markets and rental price pressures, rebounding foreign migration and stronger wages growth.

PEXA chief economist Julie Toth said interest rates have risen by 300bps in eight months to their highest level since 2012.

“This is the largest and fastest rate rise ever implemented by the RBA. The relatively direct transmission of interest rate rises to mortgagees will continue to take ever larger chunks of disposable income away from mortgage-bearing households into 2023,” she says.

An analysis from PEXA indicates that rising interest rates are driving record numbers of borrowers to refinance their loans, with PEXA’s Refinance Index hovering near its recent record high at 177.9 points (seasonally adjusted) this week.

“This is warranted, given that consumers can save an estimated $1,524 per year on average by seeking out new financing options. This is in addition to cashbacks and other incentives being offered to refinances by major home loan providers,” she says.

Vanguard said on Monday that Australia had a 40 per cent chance of entering into a recession in the year ahead, which was however far lower than the 90 per cent odds placed on US, UK, and Euro area.

RBA boss Philip Lowe has lifted rates for an eighth straight month. Picture: NCA NewsWire / Gary Ramage

In its economic and market outlook for 2023 report, Vanguard said Australia is in a better position than many other developed countries despite rising inflation and wage pressures. “Thus interest rates need not rise as much. We also stand to benefit from a cyclical rebound in China, and as a net exporter of commodities given elevated commodity prices,” Vanguard’s report states.

Overall though growth in 2023 is anticipated “to land very weak or slightly negative” in most major economies outside of China as unemployment rises. “And as a result of job losses and slowing consumer demand, a downtrend in inflation is likely to persist through 2023.”

Dr Lowe said that inflation would peak at 8 per cent over the year to the December quarter despite monthly inflation for October declining to 6.9 per cent.

“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand,” he said.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”