RBA hikes rates by 0.25% in October: How are banks responding?

After delivering four consecutive 50 basis point hikes this year, the Reserve Bank of Australia has finally decided to slow things down, lifting rates by just 25 basis points this afternoon.

This brings the cash rate to 2.60% — 250 basis points higher than it was in May before the RBA kicked off its most aggressive monetary tightening spree since 1994.

"As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role," said RBA governor Philip Lowe.

The RBA’s central forecast currently has inflation rising to 7.75% this year before falling to around 4% over 2023 as global supply-side problems are resolved and rising interest rates take effect. It is then expected to settle just above 3% in 2024.

Assuming today’s hike is passed on to customers in full, the average variable rate among lenders we track will jump to 5.25% p.a. On a $500,000 loan that will translate to an extra $73 in monthly repayments.

Overall, the cumulative 250 basis point lift in the cash rate this year will push the average borrower's monthly repayments $715 higher than they were pre-tightening. 

It’s also just half a percentage point shy of the 3% serviceability buffer banks use, which was put in place in October 2021 to stress test borrowers’ budgets.

Is the RBA moving too fast?

As higher debt servicing costs prompt households to cut back on spending, some economists are predicting we’ll have a recession on our hands unless the RBA pauses to survey the impact of its tightening policy.

They point to peculiarities in the domestic economy, such as Australia’s record high household debt levels, which make it more vulnerable to rate rises than countries with otherwise similar economic profiles.

And unlike in the US, UK and New Zealand, the overwhelming majority of Australian borrowers are on a floating rate, so it doesn’t take long before any changes to the cash rate are reflected in their monthly repayments.

Official interest rates in Australia

Lowe alluded to further interest rate increases in the months ahead, but said the size and timing will depend on incoming data around inflation and labour market conditions.

Just how high interest rates will go is uncertain. CommBank, which was one of the few banks to correctly predict today's 25 basis point move, expects the RBA will round out the year with one final quarter of a percentage point hike. This would leave the cash rate sitting at 2.85%.

How is the property market faring?

With its six successive rate hikes, the RBA is effectively signalling it would rather money sit on the sidelines in bank accounts than flow to businesses and, in particular, the property market. 

The resulting drop in property values has been one of the fastest on record. Recent data from CoreLogic showed capital city dwelling prices were down 1.4% last month, and have fallen by 5.5% since peaking in April.

Economists at CommBank expect home values to fall by 15% from peak to trough. Of course, this assumes a “shallower RBA rate cycle” than many market watchers are currently predicting, and a sharper contraction can be expected if rates rise beyond CBA's expectations.

Which banks are raising interest rates?

In each month the RBA has lifted the cash rate this year, the majority of the market has responded by raising their variable rates in kind. We expect things to play out the same way in October.

We’ll be keeping track of how banks respond to the RBA’s decision as word comes in. Visit our RBA rate tracker page for more information and use our rate change calculator to see what your repayments could look like under rate hikes of various sizes.