Interest rates continue upward march

Industry reacts as inflation struggle continues

Interest rates continue upward march

The official cash rate has been lifted by 25-basis points, taking it to 2.85%, in a move tipped by markets.

The interest rate on exchange settlement balances has increased by 25-basis points, to 2.75%.

While most lenders had tipped a 25-basis point rise, Westpac revised its forecast for a double hike, CBA putting a 40% chance on a 50-basis point rise.

The RBA’s official cash rate target has increased by 275-basis points since May, as the central bank continues to tackle rising inflation, with the CPI for the September 2022 quarter at 7.3%, up from 6.1% in the June quarter. 

Read more: It’s going to be a big interest rate hike

MPA sought comment from Heritage Bank, Heartland Finance and Connective on the RBA’s latest official cash rate decision.

Since interest rates started rising from May, brokers and lenders have discussed the “refinance boom”, as borrowers rolling off lower fixed rates search for better deals.  Lenders have indicated a shift towards variable mortgage rates, as borrowers opt for flexibility as interest rates climb.

Heritage Bank chief customer officer Stewart Saunders (pictured above left) said the seventh official cash rate rise was largely expected, with the RBA having previously said rises would need to continue to moderate inflation and reduce risks of the economy overheating.

Saunders said Heritage Bank had seen lower levels of demand for fixed rates.

In line with the looming “fixed rate cliff”, Saunders said the bank was seeing a large number of maturities across its fixed rate mortgage book.

“Customers are looking for the products best suited to their circumstances, whether that includes refixing at fixed rates higher than they had previously, or moving to variable loans,” Saunders said.

RBA governor Philip Lowe indicated the central bank had weighed up the rapid rise in the cash rate to-date and the delayed impact on borrowers, against the current elevated inflationary environment, with persisting inflationary pressures.

The RBA previously forecast inflation to reach 7.75% over 2022.  Its peak inflation forecast has now been revised to 8%.  Over the year to September, Lowe noted that CPI inflation reached 7.3% - the highest in over three decades.

Lowe said the RBA expects inflation to decline in 2023, as global supply-side issues are resolved, and due to recent declines in some commodity prices, and slower growth in demand.  Inflation is expected to be around 4.75% over next year, and slightly above 3% in 2024.

The Australian economy continued to grow solidly, although economic growth is expected to moderate over the coming year.  GDP growth is expected to be around 3% in 2022, and 1.50% in 2023 and 2024. The labour market remained tight, and wages growth is picking up, Lowe said.

“The Board has increased interest rates materially since May. This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target. The Board expects to increase interest rates further over the period ahead,” Lowe said.

Noting that November marked the seventh consecutive month of interest rate rises, Saunders said the bank had started to see an impact on borrowers’ serviceability, and total lending for new borrowers.

At this stage, arrears levels were at a record low, and the bank wasn’t seeing any particular increase in hardship applications or customer stress, Saunders said.  Low unemployment (3.5%) could be a key driver, he said, as borrowers have greater certainty around income and job security.

As interest rates increased, Saunders said Heritage Bank understood that this inevitably affected borrowers’ spending behaviour.

“As borrowers come off lower fixed rates, this creates added pressure on home loan serviceability and household budgets,” Saunders said. 

“Because there is a large proportion of customers on fixed rates, the impacts of the RBA cash rate decisions will take time to flow through and impact consumer spending behaviours.”

Read next: Will latest inflation numbers force RBA to go harder on interest rates?

Heartland Finance head of operations, risk and compliance Sharon Yardley (pictured above centre) also agreed the November rise was expected. 

“As interest rates and the cost of living continues to increase and impact cash flow, we’ve been seeing increasing demand for reverse mortgages and more people using their reverse mortgages for day-to-day expenses and debt consolidation,” Yardley said.

People were increasingly requiring funds for day-to-day expenses, debt consolidation, and were also using them for home improvements, she said. In a rising interest rate environment, reverse mortgages provide flexibility, allowing borrowers to choose the amount, how and when they repay, she said.

Connective executive director Mark Haron (pictured above right) said news of the latest cash rate rise would continue to dampen the housing market, as borrowing capacity and household budgets are squeezed.

Brokers would continue to be invaluable in helping stretched mortgage holders understand their options, which may include refinancing to enable them to affordable the loan.

“The surge in refinancing which started months ago hasn’t slowed as borrowers continue to search for ways to ease the pain of higher loan repayments and rising inflation,” Haron said.

Connective was seeing increased interest from investors and first home buyers, who Haron said were taking a more active interest in opportunities amid cooling property prices.

“First home buyers recognise the important role of brokers in helping them understand the changing lending landscape and the impacts rate rises can have on their borrowing capacity and loan pre-approvals,” Haron said.

Ahead of the November announcement, CBA’s central forecast was for 25-basis point hikes in November and December, taking the official cash rate to 3.10% - where CBA expected it to peak.  NAB said it expected the cash rate to rise by 25-basis points in November, after which the RBA would likely pause to assess the impact of rapidly rising interest rates over recent months, together with the outlook for the labour market, and when current inflation pressures may resolve.

As in the past, lenders are expected to announce increases to their variable home loan rates over the coming days, as they pass through the increased cost to borrowers.