October cash rate announced

The official cash rate is now 2.60 per cent.

Speaking of the move, RBA governor Philip Lowe said: "The board is committed to returning inflation to the 2–3 per cent range over time. [The] increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead. 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."

Speaking about the decision, managing director of the Finance Brokers Association of Australia (FBAA) Peter White AM said the Reserve Bank of Australia (RBA) must take responsibility for the difficult situation facing many Australians.  

Mr White warned that “there will be more rises to come.” 

The FBAA MD said it was "disappointing" that the RBA was telling Australians that it had no intention of raising interest rates when all of the signs were there to suggest otherwise. 

“The FBAA was warning of this in early 2021 when no one else was, and we were laughed at by commentators who were listening to the RBA," he said, adding that the RBA should have acted 18 months ago. 

“Their lack of action and lack of foresight has resulted in devastation for many Australian families," he said, adding that some borrowers may need to “think about spending a little less this Christmas and prepare for more rises.”  

“This means for many people to meet refinancing criteria, they must be able to meet repayments around five to seven per cent – and likely higher after [this rate increase]- above the rate at which they were approved when they took out their current mortgage. Depending on the amount of the loan, this can equate to more than $2,000 per month higher.”

Similarly, several aggregator heads have spoken out about the rate move.

Mortgage Choice CEO Anthony Waldron said: “The board’s decision to raise the cash rate once again will not come as welcome news to borrowers who have seen the cash rate rise six times in as many months, but an increase of 25 basis points will be a smaller hit for those already with mortgages and others hoping to enter the property market in the coming months. This may be a sign that the RBA has started to slow the pace of this tightening cycle. 

“This year has seen a serious period of adjustment for many Australians. Our brokers’ customers are already taking action on increased repayments, with many seeking better deals on their home loans and adjusting their household budgets. The challenge is that this belt tightening is yet to be reflected in the economic data, which is why the RBA is still trying to course correct and combat inflation via rate increases.” 

“Those with fixed rates are yet to feel the impact of the RBA’s decisions." 

He therefore said borrowers should be speaking to brokers "early and start planning for the end of their fixed term" given the "abundance of attractive offers from lenders vying for new customers, which puts borrowers looking to refinance in a strong position to secure a better deal.” 

Mark Haron, executive director at Connective, said that the interest rate hikes will "weigh heavily on households as they grapple with the increasing cost of living".

"In this challenging environment, brokers can support their clients by helping them understand what the latest rate rise means for them, and what actions to take—if any," he added, noting that the market was already "awash with sweetheart deals like generous cash back offers to help entice borrowers to switch lenders".

However, he flagged that it was "important brokers discuss the long-term implications of these offers".

Mr Haron explained: "It may seem like a good deal now, but down the track is it going to cost them more? Will they get the features they value in a home loan?"

The Connective executive director said that borrowers were continuing to rely on the expertise of brokers in "an increasingly complex lending environment," which was likely feeding into record levels of broker market share.

Finsure CEO Simon Bednar also commented, stating: “The RBA is certainly walking a tightrope in what it does with the cash rate each month to combat inflation.

“Evidence of a slowdown in inflation in August has been taken by some economists as evidence the RBA has already done plenty of heavy lifting. The RBA Governor Dr Philip Lowe doesn’t want to drive the economy into recession,” Mr Bednar said. 

“There have been indications the RBA’s rate rises have impacted consumers, although strong retail and business confidence numbers highlight that it hasn’t hit the spending patterns of those without a mortgage. It’s also worth noting the August and September increases by the RBA haven’t hit the hip pocket just yet because it takes six to eight weeks for the mortgage repayments to rise. 

“The latest rate rise by the US Federal Reserve and its impact on the Australian dollar weighs heavily on the RBA, but inflation is much more rampant in the US than it is in Australia. 

“Some economic commentators believe the RBA’s tightening of monetary policy is into the home stretch and we won’t see rates rise too much more. This is supported by the longer-term bond prices.

“But there are still many variables such as the ongoing conflict in Ukraine. Locally the impact of the ending of the 220cent-a-litre discount at the fuel bowser is also yet to be felt.”

Bank economists taken by surprise

The October announcement follows on from 50-bp hikes in June, July, August and September, but economists were split as to exactly what would transpire.

Economists from Australia’s big four banks largely entertained a 50-bp increase this month — which would have made it an incredible 275 bps of tightening in just five months, over six meetings.

The move continues the central bank’s rate hiking cycle, which started in May (and continued with larger rate hikes more recently) as it attempts to curb rising inflation.

Most economists had agreed on a 50-bp rise, but some suggested that local conditions still could have enabled a lesser 25-bp hike.

For example, the Commonwealth Bank of Australia (CBA) had accurately predicted a lesser 25-bp hike for October soon after last month’s 50-bp increase, which it maintained pre-RBA announcement.

Its economists stated: “We expect a 25bp hike to 2.60 per cent, but recognise there is a clear risk the RBA opt for another out-sized 50bp increase.

“We ascribe a 60 per cent chance to a 25-bp hike and a 40 per cent chance to a 50-bp hike. We consider the risk of any other move immaterial.”

However, CBA continued: “The actions of many other central banks globally lends weight to the RBA opting for another 50bp hike.

“Such a move would mean the RBA has delivered an incredible 275bp of tightening in just five months, ie over six meetings.

“But we believe the domestic backdrop does not warrant another super-sized rate hike, particularly given the RBA has recently acknowledged that, ‘the full effects of higher interest rates are yet to be felt in mortgage payments’.

“A 25bp rate hike is policy tightening and in the RBA’s lexicon it is a ‘business as usual’ rate rise. 

“A slowdown in the pace of rate hikes should not be conflated with the direction of policy.  Any rate rise is policy tightening irrespective of whether the size of the hike is smaller than the previous one.”

[Related: Review to dissect RBA’s communication style]