RBA hikes rates by 0.25%. This is how banks are responding

RBA Governor Philip Lowe

The Reserve Bank of Australia has finally decided to bring down the monetary hammer, announcing that it will increase official interest rates from 0.1% to 0.35%. 

The decision officially marks the end of the Board’s pandemic era stimulus, which it unleashed in March 2020 to shore up a struggling economy.

“The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” RBA governor Philip Lowe said.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.

“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

A number of economists believed the RBA would wait until the federal election had passed before delivering a 40 basis point rate hike in June. But a surprise lift in inflation proved too urgent to ignore.

“The RBA is keen to get a bit of normalisation into the system, and a small increase this week followed by another 25 basis point increase in June will be less alarming to people than a one-off 40 basis point hike,” said Mozo’s banking expert Peter Marshall.

Data from the Australian Bureau of Statistics last week showed headline inflation rose by 2.1% over the March quarter — the steepest increase in more than 20 years.

This brought the annual rate of inflation from 3.5% to 5.1%. The RBA’s preferred measure of inflation, trimmed mean inflation, also came in at 3.7% — well above the Board’s long-held target of 2-3%.

“This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices,” Lowe said.

Further rate hikes are expected as the Board looks to tame rising prices. A recent report by Westpac, which assumed a 0.15% increase today, forecasts a 0.25% increase in July and August, followed by further 0.25% increases in October and November.

How will mortgage rates be affected?

Variable rates tend to move in line with the cash rate, so today’s decision will likely be felt in full by anyone who hasn’t fixed their loan. 

“Lenders’ margins have had pressure on them for a couple of years now, so we can expect them to jump on any opportunity they can to rebuild those margins,” said Marshall.

“There are also signs of pressure on deposit rates. There’s a bit more competition appearing in that space so banks will be keen to get as much money from a rate rise as they can.”

Higher rates will create pain points for many borrowers, particularly those who bought at the top of the property cycle or bid above the market rate for their home.

Research by Mozo found that 8% of borrowers believe a rate hike of any size would put them under serious financial stress. Meanwhile, more than half (55%) of borrowers have not tested their ability to make repayments at a higher rate.

RELATED: Which banks have raised home loan rates?

Higher cash rate expectations have already been priced into fixed rates, so any further increases are expected to be smaller and less frequent. Nonetheless, Marshall warns that fixed rates might no longer provide the refuge they did in previous months.

“While high inflation is a key feature of the global economy at the moment, it will probably drop off over the next 12 months and there’s a chance we’ll enter a more recessionary environment,” he said.

“If that happens, currently rising global interest rates will go into reverse. So anyone locking into a five-year fixed term for their home loan now might find that well before those five years are up, they’re paying quite a bit over the market rate.”

We’ll be keeping track of which banks have increased variable rates as word comes in. If you feel that refinancing is in order, be sure to visit our home loan comparison page, where you’ll be able to filter your search by rate and type.

Which banks have increased rates?

Read last month's Reserve Bank interest rates update.

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