RBA delivers eighth rate hike in a row in final meeting of the year

The Reserve Bank of Australia has brought the hammer down one final time this year, delivering a 25 basis point hike to the cash rate that will put more strain on household budgets ahead of Christmas.

The decision takes the cash rate to 3.1%, the highest it’s been in ten years. 

If passed on to home loan borrowers in full, the average variable rate among lenders we track would jump to 5.70% p.a. — up from 3.07% p.a. at the beginning of the year. This would see repayments on a $500,000 loan go up by around $80 per month.

"A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter,” said RBA governor Philip Lowe.

“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

The question now is how much further the RBA believes it will have to go before it can confidently say inflation is under wraps.

Economists at CommBank believe this month’s decision will mark the end of the tightening cycle, but other major banks are convinced there’s still more to come.

Westpac chief economist Bill Evans expects the Board will lift the cash rate by 0.25% increments three times in 2023, leaving us with a terminal rate of 3.85% by June.

The Board isn’t scheduled to meet again until February. When it does, it will be paying close attention to consumer spending, which tends to respond to rate changes only after a three month delay.

Australian interest rates

Reduced borrowing capacity to weigh on property market

Last week, the Reserve Bank boss apologised to Australians who took out mortgages in the last two years that they are now struggling to repay. 

Previous comments about rates not going up until 2024 were taken to heart by thousands, but Mozo’s banking expert Peter Marshall said the RBA should have emphasised how conditional such comments were.

“I don’t think they qualified their message nearly enough. ASIC has some guidance on disclaimers and it says the more you need to qualify a statement the more prominent that qualification needs to be,” he said.

“Lowe’s statements needed to be very strongly and prominently qualified and I think that if ASIC had any say in the matter they’d be chasing him through the courts.”

For borrowers with $500,000 owing on their mortgage, this year’s rate hikes will have added a staggering $837 to their monthly repayments, or $10,044 over a single year.

The drop in borrowing capacity has also seen property prices tumble by 7% since peaking in April this year. According to CoreLogic’s home value index, prices fell 1% over November — a slight slowdown from previous months.

CoreLogic research director Tim Lawless said conditions were easing in Sydney and Melbourne, but the pace of decline was also slowing in other capitals and most regional markets.

“Potentially we are seeing the initial uncertainty around buying in a higher interest rate environment wearing off, while persistently low advertised stock levels have likely contributed to this trend towards smaller value falls,” he said.

“However, it’s fair to say housing risk remains skewed to the downside while interest rates are still rising and household balance sheets become more thinly stretched.”

Lawless says borrowers will be put to the test next year as the low fixed rates many secured start to expire. If combined with a longer-than-expected tightening cycle, we could see the market buckle as distressed sales become more common.

How have banks and lenders responded?

We’ll be keeping track of which lenders have raised rates as news comes in. For an overview of where rates currently sit, click here to compare home loans.