RBA interest rate rise catches markets, banks and borrowers by surprise – ABC News

RBA interest rate rise catches markets, banks and borrowers by surprise - ABC News

The Reserve Bank of Australia (RBA) has shocked borrowers and financial markets by resuming interest rate rises after a one-off pause last month.

It has lifted its cash rate target from 3.6 to 3.85 per cent, marking the 11th increase in the space of a year.

Official interest rates have not been at this level, or higher, since they were cut to 3.75 per cent in May 2012.

The move caught most traders by surprise, with the market only pricing in a 13 per cent chance of rates rising ahead of the RBA’s 2:30pm AEST announcement.

Shortly after the announcement, the Australian dollar jumped more than half a cent on the surprise move, trading around 66.9 US cents.

While the majority of the major bank economists were also tipping the rate to remain on hold this month, two had been forecasting that it had reached the peak of the rate-hike cycle at 3.6 per cent.

The majority of market economists had interpreted last week’s inflation figures as giving the RBA scope to keep rates on hold, but the bank had a very different read.

RBA governor Philip Lowe said the board had paused rate rises last month to assess the impact of previous rate rises on the economy, and strong jobs and inflation data meant it had more work to do to get price rises under control

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” he noted in his post-meeting statement.

“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”

Mr Lowe said that, while the cost of imported goods was falling as supply chain disruptions eased, the cost of domestic services was increasing at a faster pace in a worrying sign that inflation may be persistent.

He said that leaves the possibility of further rate rises to come.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” Mr Lowe added.

‘Recession roulette’

After generally being caught off guard by today’s decision, economists remain split about whether the RBA’s latest rate rise will be its last.

KPMG’s chief economist Brendan Rynne says the cash rate may need to rise one more time to bring inflation back under control in a timely way.

“The continuation of wages growth around 4 per cent per annum without a corresponding increase in productivity means these input costs are directly adding to inflationary pressures in a circular fashion,” he argued.

“It would seem the RBA has recognised this as well, and acknowledged that it will struggle to have inflation returning to the target band for at least another two years, even with some further increases in the cash rate.”

However, Pradeep Philip, the head of rival Deloitte Access Economics, slammed today’s RBA decision as increasing the real risk of a recession.

“Today’s rate increase shows that the Reserve Bank is still playing recession roulette, despite briefly and sensibly walking away from the table when it paused rate hikes last month,” he wrote.

“Meanwhile, hundreds of thousands of mortgage holders are still to see their repayments surge as pandemic-era low fixed rates revert to variable, while businesses continue to be squeezed.

“Last week’s CPI data showed that inflation is clearly slowing, and the fact it is doing so while unemployment remains at record lows is a good thing.

“And, as the RBA statement notes, despite record low unemployment, wage growth has not spiralled and is still consistent with the inflation target.”

Typical mortgage passes $1,000 a month repayment rise

The latest rate increase will add around $78 a month onto repayments for a half a million dollar home loan, if passed on in full by the banks.

A customer owing $500,000 will now have seen their repayments rise by around $1,058 a month since the RBA started hiking rates in May last year.

However, Canstar finance expert Steve Mickenbecker said that many borrowers could offset some of the general rate increase by refinancing to a more-competitive loan.

“Existing mortgage holders, with an average variable rate, are already paying 1.54 percentage points higher than the lowest variable rate of 4.94 per cent,” he observed.

“With rates already up by 3.50 percentage points, borrowers can potentially save half of the last 12 months’ increases by refinancing to one of the lowest rates.

“It’s too big an opportunity to ignore for those who are still in good enough financial shape to refinance.”

A large number of Australians are already acting.

Mortgage broker Nathan Gillard says around 80 per cent of his clients are looking to refinance.()

Adelaide mortgage broker Nathan Gillard has found a lot of his business at the moment is refinancing rather than new property purchases.

“We’re definitely seeing a majority of our clients looking to refinance, I’d probably say 80 per cent or so are refinancing,” he told ABC TV’s The Business.

“They’re rolling out of their expiring fixed rates, or having an older home loan that might be in the mid-to-high 6 per cents, and they’re seeing all these rates advertised for low-to-mid 5 per cent.

“Between lower interest rates and a cashback market, we’re definitely seeing a lot of demand there to free up some cost-of-living pressures as well.”

Adelaide home owner Courtney Rogers recently refinanced to a lower interest rate by switching banks.()

Courtney Rogers has owned her home in Adelaide for around seven years and paid it down to around $300,000 so the initial repayment increases were small.

However, as the letters from her bank notifying of repayment increases started to pile up, she decided to take her business elsewhere.

“It should be finalised in the next week or so, I’ll be saving about a percentage point on my current rate,” she said.

Initially the decision to switch lender was not an easy one after years of loyalty to one bank but, after talking to her broker, the numbers stacked up.

“The fact that my interest rate never dropped below 3.09 per cent during that really super-low interest rate period, when everyone else was getting a much better deal, kind of leaves a bitter taste in your mouth,” she said.

“I think people are definitely starting to feel that massive increase on their personal finances and I think it’s really impacting the decisions that people are making.”


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Source: abc.net.au

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