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RBA cash rate soars to hefty 0.85%

June 7, 2022

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The Reserve Bank of Australia (RBA) this week accelerated the cash rate by a mammoth 0.50%, or 50 basis points (bps), to 0.85%.

It's the first time in 22 years that the RBA's monthly cash rate has increased by more than 0.25% and follows the first increase in 18 months to 0.35% in May.

Last month's decision was also the first interest rate hike in a decade.

As with the RBA's May decision, today's announcement was unsurprising but still a much higher than expected hike.

Economic experts' opinions were mixed on how far the RBA would continue to increase cash rates this month, but general predictions were for an 0.25-0.4 percentage point hike.

Coupled with dramatic recent increases in petrol and energy prices, today's decision is expected to make the already tough cost of living become even tougher.

Jumbo interest rate spike will be worth it

In today's cash rate announcement, RBA governor, Dr Philip Lowe, didn't shy away from the fact that inflation has increased significantly and is expected to increase further.

However, he maintained that today's jumbo cash rate hike was necessary given current inflation pressures in the economy and the still very low level of interest rates.

He pointed to both global and domestic factors for the larger than expected increase, with the latter including a tight labour market and higher energy and petrol prices.

Dr Lowe also acknowledged the pressure that greater inflation and interest rates would place on household living costs, with just how household spending would evolve being a "source of uncertainty about the economic outlook."

But he was confident this pressure would be worth it in the long term with a "central scenario" for strong household consumption growth this year while he expected inflation to drop to around 2%-3% next year as global supply issues and commodity prices stabilised.

"Today's increase in interest rates will assist with the return of inflation to target over time," Dr Lowe explained.

"Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending.

"The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers."

Dr Lowe maintained his confidence in Australia's resilient economy, which he said had grown by 0.8 per cent in the March quarter and 3.3 per cent over the year.

"Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed," he said.

"The labour market is strong, employment has grown significantly and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years."

Cash rate heavy lifting = tough double whammy

CoreLogic research director, Tim Lawless, concurred that the RBA would continue to increase interest rates throughout 2022 and into 2023 as underlying inflation moved sharply upwards to 3.5% over the year.

This hike would mean tough times for both prospective borrowers and mortgage holders, Mr Lawless said.

The former group will see their borrowing capacity lowered and their household savings and balance sheets tightening sharply, resulting in a negative effect on serviceability assessments.

Mortgage holders in the meantime should expect variable mortgage rates to increase over the coming week to around 3.16%.

"This will add approximately $200 per month in additional repayments on a $500,000 mortgage, compared with mortgage rates in April," Mr Lawless explained.

Mr Lawless added that for already indebted or struggling households, today's jumbo cash rate hike would add to financial woes.

"The additional cost of debt comes as non-discretionary inflation rises at more than twice the pace of prices for discretionary goods," he said.

"Higher costs for food, fuel and finance are likely to see household savings continue to taper as families funnel more of their income towards servicing their mortgage and funding essential costs of living."

However, there was some good - or not so bad - news from today's RBA announcement.

Mr Lawless said the new 0.85% figure is only somewhat to blame for the softening property market.

"Home values were already easing well ahead of the rising cash rate," he said.

"A combination of higher fixed mortgage rates, lower consumer sentiment, tighter credit conditions and worsening affordability have all played a role in the slowdown to date."

Mr Lawless also maintained his opinion that the effect of rising rates on the property market would depend on how fast and how high interest rates move and normalise, along with the performance of the broader Australian economy and labour market.

"A stronger economy, along with the tightest labour market conditions in a generation, should help to ensure the ensuing housing downturn remains orderly," he said.

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If you're a homeowner, we encourage you to contact your lender soon to check where your interest rates will trend from here, particularly if you have a variable rate home loan.

Whether you’re a first-home buyer or property investor, you may also want to consider refinancing your loan to achieve the best possible deal.

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The RBA’s next monthly cash rate announcement will be on Tuesday, July 5 at 2.30pm AEDT.


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