The pain is officially on its way for Australian homeowners, with the Reserve Bank announcing the first interest rate hike since 2010.
Australian homeowners have been dealt a blow, with the Reserve Bank of Australia announcing the first interest rate hike in more than a decade in a shock move.
The RBA announced on Tuesday afternoon that it would raise Australia’s official exchange rate by 25 basis points to 0.35% from 0.1%.
While a rate hike was widely expected, most pundits were predicting a much more modest 15 basis point increase.
It’s the first rate hike in 11 years – since November 2010 – and is a desperate attempt to quell soaring inflation, which has hit an annual rate of 5.1% and pushed up prices at the fastest rate in two decades.
It’s also the first rate hike in an election campaign since 2007, when John Howard lost to Kevin Rudd, and the ALP wasted no time in putting the boot to the prime minister.
“It was hard enough to make ends meet under Scott Morrison and today it has become even harder for millions of Australians,” Shadow Treasurer Jim Chalmers said in a joint press release.
“Even before today’s decision, Australians were facing a real cost of living crisis on his watch.
“Scott Morrison’s economic credibility was already in tatters, now it’s completely shredded.”
The country’s cash rate is at an all-time low of 0.1 since 2020, when it was cut in response to the Covid-19 crisis.
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The RBA Shock Blow
In a statement released immediately after the decision, RBA boss Philip Lowe said “now is the time to start withdrawing some of the extraordinary monetary support that has been put in place to help the Australian economy during the pandemic”.
“The economy proved resilient and inflation rose faster and higher than expected,” he explained.
“There is also evidence that wage growth is accelerating. Given this and the very low level of interest rates, the process of normalizing monetary conditions should be initiated.
“The resilience of the Australian economy is particularly evident in the labor market, with the unemployment rate falling in recent months to 4% and the labor force participation rate rising to a record high.
“Jobs and vacancies are also at high levels. The central forecast is for the unemployment rate to drop to around 3½ percent at the start of 2023 and stay around that level thereafter. That would be the lowest unemployment rate in nearly 50 years.
While noting that “the outlook for economic growth in Australia also remains positive”, Dr Lowe said there were “continuing uncertainties” about the rise in the global economy due to the Covid pandemic, the war in Ukraine and “the decline in consumer purchasing power due to higher inflation”. .
Dr. Lowe also gave an ominous hint of things to come.
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further rise in interest rates over the period ahead,” said he declared.
“The Board will continue to closely monitor incoming information and the evolving balance of risk as it determines the timing and magnitude of future interest rate increases.”
A media and market briefing, including a Q&A, will take place today at 4 p.m. AEST.
Australia reacts to the bomb
Callam Pickering, APAC economist at the Global Jobs site Indeed, said “rampant inflation” had left the RBA no choice but to raise the cash rate today – but s wondered if more could have been done.
“This rate hike will be the first in a long series over the next six months as the bank tries to bring down historically high inflation. Under these circumstances, it was surprising that they hadn’t walked more aggressively,” did he declare.
“Supply chain disruptions and the war in Ukraine have pushed inflation to its highest level since the introduction of the GST in 2000.
“It is difficult to determine whether these rate hikes will work. Australia has imported high inflation from abroad and this is generally not a channel through which the RBA has huge influence.
“If the RBA raises rates at a slower pace – which it almost certainly will – the resulting depreciation of the Australian dollar would put upward pressure on inflation.”
PropTrack economist Paul Ryan agreed that the RBA’s hand was forced.
“By acting today, rather than waiting for new data in June, the RBA is signaling that it will step in to rein in stronger than expected inflationary pressures, despite the ongoing federal election campaign,” he said. .
“While the RBA seeks to remain independent of politics, failure to adjust politics may have been viewed as greater political intervention.
“While this rate hike was small, it signals the start of a series of interest rate hikes before the end of 2022. This will weigh on house price growth, which has clearly slowed in anticipation. of these higher borrowing costs.”
Rate hikes ‘are not going to stop’
Although a rate hike to 0.25% is relatively minor, economists believe the RBA won’t stop there, with some pundits predicting interest rates will hit 2.5% by the end of 2022 .
In fact, Nomura Australia Senior Economist and Rates Strategist Andrew Ticehurst recently said The Daily Telegraph they believe that the interest rate will be increased monthly until December, which means that we could have a rate increase every month until Christmas.
According to comparison site Rate City, a rate hike to 0.25% would result in repayments jumping $39 for the average homeowner with $500,000 debt and 25 years remaining – a figure that will jump to $511 per month if the cash rate continues. drop to 2%, as generally expected.
Rate City’s research director, Sally Tindall, said borrowers “should be aware that the RBA won’t stop at just one hike.”
“The RBA is likely to raise the cash rate several times over the next six to 12 months as it works to bring inflation under control,” she explained.
“If the cash rate reaches 2% by May next year, someone who owes $500,000 on their loan today and has 25 years left could be looking at a total increase in their monthly repayments of $511. .
“This is going to be a lot for many borrowers to swallow, especially for those who are already struggling to squeeze monthly budgets.
“Floating rate borrowers don’t have to put up with these RBA hikes. If you haven’t had a mortgage health check recently, now is the time to do it.
But the prospect of ever-rising rates has some worried, with Australian Council of Social Services CEO Dr Cassandra Goldie warning the next government against taking a hard line on budget spending.
“Interest rates will inevitably rise above their historic lows, but we hope the RBA will follow its own advice to move slowly from now on so that the benefits of full employment materialize,” she said.
“In addition to improving income supports for those who are struggling the most, the best way to ease cost-of-living pressures is to strive for full employment, promote wage growth and tackle the housing crisis, especially for tenants and those who find it most difficult.
“Avoiding a rapid rise in interest rates would also lessen the impact on people who have taken on high levels of debt, with little funds behind them, to enter our vastly overvalued housing market.
“Major parties should rule out brutal budget cuts like those of 2014 that would stifle job growth.”
Good news for savers
However, a rate hike is not bad news, with savers set to be the big winners after two long years of earning little or no interest.
“With inflation rising at the fastest pace in two decades and savings rates at historic lows, most people’s hard-earned money has shrunk. It’s time to turn the tide,’ Ms Tindall said.
“While we expect banks to finally start raising deposit rates, there is no guarantee that they will mirror the RBA throughout the process.
“The banks are full to bursting with cash. It will make the exercise expensive to pass on these hikes in their entirety, but they should.