3.10% December cash rate confirmed: RBA

In what was hardly a shock to many economists, the new 3.10 per cent cash rate - the highest level in a decade (November 2012) - will stand until the RBA board meets again in early February 2023, when many economists expect a further rate rise.

The December rate announcement was the RBA’s eighth consecutive increase to the cash rate. The rising rate cycle, which commenced in May, means the cash rate has now risen by 300bps this year, as the RBA continues its hiking cycle to curb inflation.

Prior to the December rate call, economists from Australia’s big four banks were virtually in agreement that a pause in the rate jumps was ‘highly unlikely’ in the lead-up to the festive season – and it proved thus so.

Speaking after the decision, RBA governor Philip Lowe explained: " The board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain. Another source of uncertainty is the outlook for the global economy, which has deteriorated. The Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.

"The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. 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." 

Predicting when rates level out is uncertain

Reacting to the announcement, industry figures have suggested that consumers need to be prepared for official interest rates to keep rising in 2023 as the Reserve Bank of Australia (RBA) continues battling inflation.

Finsure CEO Simon Bednar said while a dip in the annual inflation rate may have given the RBA board an opportunity to pause and reflect on its rate strategy ahead of the holidays, the central bank’s priority is to bring inflation back to the target range.

“Although the annual inflation rate through to October 2022, was lower than expected at 6.9 per cent, the RBA is likely to keep raising rates,” Mr Bednar said.

“With inflation still way above target range we are likely to see more increases when they return in February. We are not likely to see any relief from the RBA until they are confident the rate rises dampen consumer spending.

“If the RBA want to see the inflation rate come down then the only tool they have is to keep increasing rates," he continued. 

“They need to get on top of inflation and unless they increase the cash rate consumers won’t heed the warnings.”

Mr Bednar said at this stage it was difficult to predict when the upward interest rate cycle would level out.

“I believe we are likely to see rates settle within the range of 3.35 per cent to 3.85 per cent, which means a few more rises into the first half of next year,” he said.

“The Commonwealth Bank is forecasting the cash rate will peak at 3.1 per cent, but other major banks are predicting it could go as high as 3.85 per cent.”

Mr Bednar said it was significant that during the rate-rising cycle, which started in May this year, consumers have been relying more on the expertise of finance brokers for guidance.

“The latest data compiled for the Mortgage and Finance Association of Australia (MFAA) shows for the first-time mortgage brokers facilitated more than 70 per cent of all new residential home loans,” he said.

“In the current rising interest rate environment, and with many borrowers reverting from fixed to variable rates, brokers are well placed to help their clients obtain a more competitive interest rate with their current lender or refinance to a different product in their best interests.”

Be prepared for change

Mortgage Choice CEO Anthony Waldron said: “Today’s decision marks the eighth cash rate hike since May, a trend which has meant significant adjustments for borrowers on variable rate home loans.”  

“Reserve Bank data shows that a large volume of fixed-rate loans will expire next year.

“Around two-thirds of outstanding home loans are currently on fixed-rate terms and two-thirds of these are set to expire by the end of 2023. These borrowers could see their home loan interest rate increase by 3–4 per cent when their fixed term ends and they move to a variable rate. 

“It’s important borrowers coming off fixed rates are prepared for the change.

Our Mortgage Choice brokers are actively talking to borrowers who fixed their rate in the last couple of years to help them prepare for the shock of moving onto rates that might be double what they’ve been paying. And it’s not as simple as re-fixing your rate because fixed rate pricing has shot up in the last two years.”  

Pressure on the housing market

Rising interest rates continue to put pressure on the housing market. The PropTrack Home Price Index revealed that national home price falls accelerated in the last month of Spring, with national prices recording a 0.16 per cent drop in November. Prices fell in nearly every capital city, with Darwin (-0.49 per cent) and Melbourne (-0.33 per cent) recording the largest falls. 

PropTrack economist Eleanor Creagh said, “The fastest rise to the cash rate since the 1990s has quickly rebalanced the housing market from last year’s extreme growth levels, with prices falling in most parts of the country. Prices nationally are now sitting 3.81 per cent below their March peak after falling for the eighth month in a row amid headwinds from monetary tightening.” 

“With additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, shrinking buyers’ budgets.”

Difficult economic conditions in 2023

CreditorWatch chief economist Anneke Thompson suggested that the rate rise will "place undeniable financial pressure on Australian households".

“Combined with the Budget’s forecast rising prices on everyday goods, housing and energy, and lacklustre wages growth, this latest increase in the cash rate all but guarantees consumer confidence will weaken as we enter the busy Christmas retail period," she said.

“Data and forecasts released in the latter half of October all point to difficult economic conditions in 2023.

“The RBA board will likely have carefully considered labour force data, which showed that the unemployment rate has stagnated at 3.5 per cent, employment growth has slowed dramatically, and job vacancies have stopped rising," she said, flagging that data from employment marketplace SEEK points to "a slowdown in jobs growth", with job ads declining month on month for four months now, and by a 5.2 per cent over September 2022, the largest decline all year.

“And in a sign that increasing migration is starting to help employers fill more roles, there was a 10.3 per cent increase in applications for job ads month on month, the greatest rise since April 2020," Ms Thompson continued.

“The RBA has a dual role to maintain inflation within the target band of 2 and 3 per cent and also maintain full employment.

“Clearly, those two aims are incompatible in the current environment, as it will be almost impossible to bring inflation back to the target band if employment remains ‘full’. As a result, the RBA will be relieved to see the labour market slowing, as it is essential to help them get inflation back under control.

“It is likely given all signs are pointing to a weakening economy that the RBA will take slower steps in tightening monetary policy, as they try to avoid sending Australia into recession.

“Despite continuing very strong business sentiment, CreditorWatch data reveals businesses are starting to feel more financial pressure, with B2B trade defaults and court actions rising on a trend basis,” Ms Thompson explained.

[Related: Rate rises fuel savings frenzy]