RBA delivers another super size rate hike in September. How will banks respond?

The Reserve Bank of Australia’s mission to quell inflation continues this month with another 50 basis point increase to the cash rate, the fourth month in a row the Board has delivered a hike of that size.

The Board judged that it will be another 2 years before inflation returns to around 3%. While unemployment fell to 3.4% in July, it will likely tick higher as the economy contracts in the months ahead.

In his post-meeting statement, RBA governor Philip Lowe said further hikes were to be expected, but he reiterated his comments from August that the Board is not on a pre-set path.

That said, the RBA faces mounting pressure to keep the increases coming, particularly from central bankers abroad who are deep into the rate hike cycle and showing no signs of slowing down.

In the US, Federal Reserve boss Jerome Powell recently made clear that the tightening cycle will continue until price stability is restored, arguing that the hit to households and businesses will be greater if the Fed doesn’t act.

Powell warned that another “unusually large” increase in the Fed funds rate may be necessary to bring inflation closer to its 2 per cent target. The news left markets reeling, with the ASX falling around 4% and Wall Street tumbling 7%.

Official interest rates in Australia

If the RBA was considering a 25 basis point hike ahead of today’s meeting, such a hawkish announcement from the world’s biggest central bank would have provided strong reason to reconsider.

The pace of tightening is expected to slow down from here, with Westpac economists pencilling in 25 basis point hikes at each meeting until February 2023. By that point, the cash rate is expected to sit at 3.35%.

Mortgage holders dealt another financial hit

Going off the average variable rate in our database of 4.56% p.a., a borrower with a $500,000 loan and 25 years to go stands to see their monthly repayments jump by $144, assuming today’s increase is passed on in full.

Mozo’s banking expert Peter Marshall said borrowers will have a hard time finding worthwhile options among fixed rates, which have completely lost their sheen following months of preemptive hikes by lenders.

“Even if variable rates go up another 75 basis points, you’re still better off compared with most fixed rates, which are fairly regularly above 5% p.a. I think there’s quite a buffer before fixed rates become appealing again,” he said.

RELATED: RBA rate tracker, what does an increase mean for your home loan?

At the same time, we’re beginning to see signs that fixed rates have reached their peak, with 29 lenders in our database making cuts to at least one longer-term fixed option last month.

“There’s been a realisation that we’re not on a one-way path to higher rates long-term and that the inflation issue that was the primary driver for rates being pushed higher is going to pass at some point,” said Marshall.

“The bank economists are questioning what the RBA has been saying about its longer-term forecasts and coming to a fairly strong consensus that before the end of next year we’ll see rates being trimmed again.”

RBA “flying blind” on rate hikes

The increase in the cost of borrowing has already flowed through to property prices, which are currently falling at the fastest rate in almost 40 years. But it’s less clear how this year’s rate hikes have impacted spending.

That’s because there is typically a three-month lag between the RBA lifting rates and when borrowers on variable rate loans see their repayments go up.

CBA’s head of Australian economics Gareth Aird said this means it’s too early to judge how rate hikes have impacted households’ cash flow, let alone employment, inflation and wages.

“Up until July most borrowers on floating rate mortgages had felt no impact from a cash flow perspective. This enabled them to continue to spend as they were previously, thus the official spending data has been strong,” said Aird.

“The rapid pace at which the RBA has tightened policy, overlaid with a full appreciation of the lags between rate hikes and the cash flow impact on a home borrower, means there’s a degree to which the RBA Board is flying blind.”

Which lenders have increased rates?

We’ll be keeping track of how banks respond to the RBA’s decision as word comes in. For more information, visit our RBA rate tracker page or our home loan comparison page.