Borrowers squeezed further as RBA hikes interest rates to 3.35%

The Reserve Bank of Australia has wasted no time resuming its rate hike cycle, lifting the cash rate by another 0.25% at its February meeting this afternoon. The decision brings official interest rates to 3.35%.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” RBA governor Philip Lowe said.

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

We’re now ten months into the tightening cycle and the inflation challenge has proven more formidable than many initially expected.

The latest ABS figures showed annual inflation clocked in at 7.8% in December 2022, up from just below 2% in the pre-pandemic years.

Trimmed mean inflation — which smoothes over volatile price swings and is the central bank’s preferred measure — was also up 6.9% for the year, a notch higher than the 6.5% the RBA was expecting.

Any income gains Australian workers have seen have been eclipsed by surging prices, translating to declining real incomes and forcing households to think twice before spending on non-essential items.

While higher rates have benefited some groups, such as self-funded retirees who rely on interest income, mortgage holders haven’t been so appreciative.

On a $500,000 loan with an interest rate of 5.68% p.a. (currently the average variable rate among lenders we track), today’s decision will add an extra $90 to borrowers’ monthly mortgage repayments.

That’s on top of the extra $893 per month the average borrower has had to fork out as a result of last year’s combined rate hikes.

Also of concern is the number of fixed rate loans rolling over to much higher variable rates this year, which RBA head of economic analysis Marion Kohler recently warned could be as high as 800,000.

How these borrowers fare once their new repayments kick in will have serious implications for the property market. Too many entering arrears or — worse — defaulting would only deepen the current downturn.

So far, national home values have fallen 8.9% from their April 2022 peak, according to property research firm CoreLogic. But there’s still a long way to go before the gains from the most recent boom are undone.

“Record declines in home values follow a record upswing, both in magnitude and speed. The national [Home Value Index] was up a stunning 28.6% in the space of just 19 months,” said CoreLogic research director Tim Lawless.

“Despite the recent sharp drop in values, every capital city and rest-of-state region is still recording home values above pre-pandemic levels, although Melbourne’s index would only need to fall a further -0.4% before equaling the March 2020 reading.”

Will the RBA lift rates further?

Not including its usual January break, the RBA has delivered a rate hike each month since May last year. So is the tightening cycle drawing to a close or can we expect more?

That all depends on whether prices continue to rise. While the inflation readings so far haven’t returned the results the RBA would like to see, there are signs that price pressures are easing.

“It’s still a bit alarming to go shopping these days, but it doesn’t seem to be getting worse,” said Mozo’s banking expert Peter Marshall.

“A lot of the global supply chain issues are easing as well, so there’s every reason to expect that that’s going to continue over the next 12 months no matter what the RBA does.”

Westpac economists — who have typically held a higher trajectory for the cash rate than most analysts — believe rates will go up on two more occasions this year to peak at 3.85% in May. 

They acknowledge that rates that high will be a drag on the economy, but suspect that households have large enough savings buffers to help stave off a recession.

Figures from the RBA show the median mortgage borrower is currently 20 months ahead on their repayments. At the same time, a worrying 20% of variable rate borrowers are just 0 to 3 months ahead.

Which banks have increased rates?

We’ll be keeping track of which lenders have increased rates in the table below as word comes in. To see how your lender’s rates stack up against others in the market, visit our home loan comparison page.