Great another 0.25% increase and just before Christmas.
In the final decision for 2022, the RBA pushed up rates for the eighth consecutive month, after hikes began in May from a record low of 0.1 per cent.
It means rates have jumped again from 2.85 per cent to 3.1 per cent, which will lift the official cash rate to its highest level in 10 years.
The Commonwealth Bank, Australia’s biggest home lender, has changed its forecasts to have the Reserve Bank hiking rates again in February to 3.35 per cent, rather than stopping in December.
Chief Economist at AMP Shane Oliver said he believes the cash rate has now “peaked” — with a high risk of one final 0.25 per cent hike to 3.35 per cent in February. By end 2023 or early 2024 he expects the RBA to start cutting rates.
“Our base case is that we are now at the peak, albeit with the high risk of one final 0.25% hike to 3.35% early next year,” he said.
RBA rate hiking cycles. Picture: RBA, AMP
“By early next year we expect that the combination of a sharp slowing in domestic demand, increasing signs that inflation has peaked and sharply weaker global growth which will in turn also drive inflation down will enable the RBA to keep rates on hold for an extended period. By late next year or early 2024 we expect the RBA to start cutting rates.”
However other economists have predicted worse to come and the RBA governor Phil Lowe said there may well be further rises coming.
“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” he said. “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 major banks ANZ, NAB and Westpac had all forecast a 0.25 per cent increase, while Commonwealth Bank has also tipped the same rise although said there was a small chance of “no change”.
An 0.25 per cent increase would take the average discounted mortgage rate to 6.55 per cent, up from 3.45 per cent in April.
It means that months of interest rate hikes have seen $750,000 mortgages be slugged with an extra $1418 to monthly repayments.
Another 0.25 per cent rise would typically add $75 to monthly repayments for each $500,000 borrowed, according to RateCity, while homeowners with a $1.5 million loan would have seen their repayments jump by a whopping $2500 since May.
CreditorWatch chief economist Anneke Thompson said the eighth consecutive 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 explained.
“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.”
Canstar’s group executive financial services, Steve Mickenbecker
Canstar analysis of lenders’ interest rates shows existing borrowers could be gifting the banks $155 more than new customers each month by paying a higher interest rate.
RBA data as recently as October shows there’s a 0.51 per cent difference between the interest rates existing borrowers are paying compared with new customers who are getting enticing special offers.
New borrowers are securing an average variable rate of 4.58 per cent compared to the much higher rate of 5.09 per cent afforded to existing borrowers.
On a $500,000 loan over 30 years, the difference in monthly repayments between these two rates amounts to $155.
Switching to a new lender in October dropped by 1 per cent from the previous month with less than $18 billion in loans refinanced.]
REA Group’s Cameron Kusher added the RBA had been clear there is still work to do to tame inflation and said he expected interest rates increases in December, as well as February and March next year and then a period of stability.
RBA governor Dr Philip Lowe. Picture: NCA NewsWire / Gary Ramage
Last month, the RBA governor Philip Lowe flagged more interest rate increases after he issued a warning about inflation, saying that Australia risks a “severe recession” if the organisation doesn’t lift interest rates to combat the cost of living.
“The eel of inflation will be with us for longer (if we don’t lift rates) and the eventual increase in interest rates needed to bring inflation down will be even larger is would increase the risk of a seed, severe recession, and a sharp rise in unemployment,” he said during a speech to business leaders in Hobart in November.
Inflation is currently sitting at 7.3 per cent, something the RBA has been trying to tackle, as the cost of living increases sit at their highest since the 1990s.
Dr Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.
“If we need to step up to larger increases again to secure a return of inflation to target we will do that,” he said.
“Similarly, if the situation requires us to hold steady for a while, we will do that.
“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”
There are different views on what will happen to interest rates in 2023. Picture: NCA NewsWire / Gaye Gerard
However, there could be some relief in sight for homeowners with some experts predicting the RBA to pause its aggressive round of rates hikes from next year.
HSBC senior economist Paul Bloxham saying there was a real chance the RBA could pause rising rates in early 2023, although hikes could return later in the year if the inflation problem lingers.
However, Morgan Stanley has tipped rates to keep increasing.
“Inflation is likely to show some re-acceleration, wage growth should continue to rise, and while spending and unemployment are likely to begin to turn, both will still be quite strong,” a note from the bank said.
“We forecast further 25 basis points hikes from the RBA in February and March to a terminal cash rate of 3.6 per cent.”
As for Australia’s big banks, CBA has predicted rates to stay at 3.1 per cent, while Westpac and ANZ expect it to peak at 3.85 per cent in May.
There is $270 billion mortgage cliff looming in 2023. Picture: Getty Images
It comes as the looming “mortgage cliff” is set to hit next year with at least $270 billion in mortgages coming off historically low fixed interest rates.