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Australia’s central bank has revealed a cash rate hike to start 2023.
Struggling borrowers have been dealt further mortgage grief after the Reserve Bank of Australia (RBA) called its ninth consecutive hike since May last year, upping the official cash rate to 3.35 per cent on Tuesday (7 February). This marks the highest cash rate level since late 2012.
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The extra 25 basis points (bps) was expected by many economists, and is expected to be just one of several hikes this year, after January inflation figures showed CPI had hit a new 33-year high.
Indeed, most economists have tipped that the RBA wil increase rates further at the next RBA board meeting on Tuesday, 7 March 2023.
After announcing the rate decision for February 2023, RBA governor Philip Lowe warned: "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.
"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.
"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."
February’s rate announcement continues the rate-hiking cycle, which began last May (when rates rose 25 bps). The central bank then raised rated by 50-bps in June, July, August, and September before returning to 25-bp hikes in October, November, and December 2022.
There was no rate call in January, as is always the case, but the reprieve didn’t last long. Borrowers are now facing an extra 325 bps on their variable home loan rates than they were this time last year..
RBA on an economic tightrope, says Finsure
Aggregator Finsure suggested that the RBA is “walking on a tightrope” with its monetary policy decisions, as it risks tipping the economy over the edge if it inflicts too much interest rate pain.
Finsure chief executive Simon Bednar said that as inflation is unlikely to subside in the first half of this year, mortgage holders can certainly expect more interest rate rises, with only the size of them being uncertain.
“Although the RBA in 2023 is unlikely to repeat its efforts of last year when it increased the cash rate by 3 percentage points to counter rising inflation, they need to tread carefully and not tip the economy over the edge,” Mr Bednar said.
“While we could see a few more rate rises, and I believe increments of 25 basis points are more appropriate, at some point the RBA will need to keep their powder dry and sit back and assess the impact of the rate increases. Conversely, if they do go harder with the increments, it could force an earlier retreat on rates.”
Mr Bednar said another major consideration for the RBA is whether banks will come under pressure to lift their rates out of cycle due to cost-of-funding issues as a result of refinancing $188 billion in cheap Term Facility Funding from the central bank.
Full impact yet to come, says Mortgage Choice
Mortgage Choice CEO Anthony Waldron also highlighted that “persistently high inflation has forced the Reserve Bank to deliver the ninth consecutive cash rate increase."
“Many borrowers are yet to feel the full impact of rate rises as they wait to roll off lower fixed interest rates over the next few months," he added.
“Many of these borrowers will need to adjust their budgets in 2023 to account for significant increases in their mortgage repayments.”
Mortgage Choice home loan application data has found that despite rising interest rates, the vast majority of borrowers are prepared to ride out the wave.
Demand for variable-rate home loan products remains steady, with 94 per cent of borrowers choosing this type of product over fixed rates in January.
Interesting times ahead, says Shore Financial
Theo Chambers, broker and CEO of NSW-based brokerage Shore Financial — which ranked fourth in the recent Top 25 Brokerages 2023 — explained: “This is going to result in a big pinch on households.
“What we are going to see in the next 12 months is more volatility in the property market.
“There’s some pain to come off the back of $370 billion worth of fixed loans coming off fixed rates of 2 per cent and landing on variable rates of above 5 per cent.
“Later this year, a lot of households will see their repayments more than double overnight. That coupled with decreased consumer spending does mean the economy will feel a bit of a pinch, so there are still some turbulent times ahead.”
Pricing getting sharper, says Zippy Financial
While Tuesday’s (7 February) 25-bp cash rate increase was widely expected, Zippy Financial director and principal broker Louisa Sanghera said the sector was already preparing for a reduction in interest rates in the not-so-distant future.
“Variable interest rates are coming down right now, plus, pricing is getting sharper and more competitive at the moment,” Ms Sanghera said.
“Fixed rates are also a bit more stable with some lenders even reducing fixed rates at the end of last year.
“Over recent months, we have seen variable rates on offer drop from 4.83 per cent to 4.63 per cent and fixed rates at about 5.29 per cent from some lenders.”
Ms Sanghera said while Tuesday’s (7 February) cash rate increase was widely expected by the market, it is clear that higher interest rates are starting to hurt households.
[Related: 58.3% hike in store for super-low fixed-rate borrowers]
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