Reserve Bank of Australia raises cash rate by 0.25, adding thousands to mortgage payments
Australian homeowners will have to fork out thousands more in repayments every year as the Reserve Bank of Australia announces another interest rate hike.
The change is a 0.25% increase and takes the cash rate to 2.6%, the highest level since 2013.
It is also the sixth consecutive increase since May 2022.
The RBA continued its rapid pace of rate hikes to ensure inflation expectations remain anchored around its 2-3% target.
Graham Cooke, head of consumer research at Finder, said Australians with a $500,000 mortgage will now pay nearly $9,000 more a year in interest than just six months ago.
“Australians with a $500,000 mortgage will be paying $735 more a month than they were paying in April,” he said.
“It’s a huge amount of extra money to pay each month, especially when the prices of everyday items like groceries and gas are skyrocketing.
The average monthly repayment is $2,966 per month and $35,592 per year, with the latter figure increasing by $8,820 over the past six months.
Reserve Bank of Australia Governor Phillip Lowe said fluctuating inflation levels for at least the next year will bring new challenges.
“A further increase in inflation is expected over the coming months, before inflation then eases back towards the 2-3% range,” he said.
“The expected moderation in inflation next year reflects the ongoing resolution of global supply issues, recent declines in some commodity prices and the impact of rising interest rates.
Australia cash rate 2022
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. According to the Bank’s central forecast, CPI inflation is expected to be around 7¾% in 2022, slightly above 4% in 2023 and around 3% in 2024.”
Mr Lowe went on to say that how Australians react to the latest hikes will determine what similar measures may be needed in the future.
“One source of uncertainty is the outlook for the global economy, which has deteriorated recently. Another is how household spending in Australia is responding to tighter financial conditions,” he said.
“Rising inflation and higher interest rates are putting pressure on household budgets, and the full effects of rising interest rates are yet to be felt on mortgage payments.
“Consumer confidence has also fallen and house prices are falling after previous strong increases.”
Rates haven’t risen this fast since 1994, when the spot rate jumped from 4.75% to 7.5% in just five months.
CreditorWatch chief economist Anneke Thompson said the rise comes amid an unstable financial backdrop across the globe.
“Global factors played a key role in today’s RBA decision as inflation continues to remain sticky in the US and currency movements make inflation harder to control in Australia,” said Ms. Thompson.
“The US Federal Reserve raised interest rates an additional 75 basis points in September and signaled it would not stop until inflation there was well contained.”
Ms Thompson went on to note that Australia’s unpredictable labor market had an impact on overall economic stability.
“There are now 10,000 fewer jobs available in Australia than three months ago. This is a predictor of unemployment, and coupled with the increase in labor supply by through migration, we may have already seen our trough in the unemployment rate,” she said.
“As the strength of employment has been a key driver of consumers’ willingness to spend, the RBA will be watching this data closely.
“If the unemployment rate continues to fall, the RBA may choose to make more ‘wait and see’ decisions as we move through the remainder of 2022 and into 2023.”
The big four banks forecast a cash rate above 3% by the end of the year, with Westpac predicting that it could reach 3.60% by February 2023.
Financial expert, Steve Mickenbecker of Australia’s biggest financial comparison site, Canstar, said borrowers need to adjust to the new normal of higher interest rates.
“Borrowers will have to get used to dealing with higher interest rates as the norm,” Mickenbecker said.
“Even if inflation remains well above the Reserve Bank’s target, it may still find a case for a conservative pause in cash rate hikes. abroad, and with wage inflation well below price inflation and rising interest rates, recent borrowers in particular are going to be under extreme stress.
Based on Westpac’s forecast, Canstar’s analysis shows that the average variable rate on home loans could skyrocket to 6.48% by the end of February.
This would more than double since the rate hike cycle began in April 2022 and increase monthly repayments by 50% over this period.