RBA announces hefty rate hike

Find out how much it increased

RBA announces hefty rate hike

The official cash rate has hit 0.85%, increasing by a half of a percentage point from 0.35%, the Reserve Bank of Australia announced today.

It marks the second successive rise after the RBA took the cash rate off a record-low 10 basis points in May, amid a 5.1% jump in annual inflation. The latest inflation rate has not yet been released but many economists are predicting it will be well over 6%.   

The RBA has indicated the rate hike path will continue, as it unwinds monetary policy stimulus put in place to assist the economy through the COVID-19 pandemic. 

Delivering the June monetary policy statement on Tuesday, RBA governor Philip Lowe said inflation continued to track at a level beyond the central bank’s 2% to 3% annual target over the medium term.  

Inflation is expected to increase further, before dropping back towards the target range next year.

“Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation,” the RBA said.

Latest figures show wages increased 2.4% over the year to March (0.7% over the March 2022 quarter).  Gross Domestic Product increased to an annual rate of 3.3% (0.8% over the March 2022 quarter), marking a second quarter of growth within the economy. The unemployment rate is 3.9% - the lowest rate in almost 50 years.

“Today's increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” the RBA said.

The RBA said it would continue to pay close attention to the global outlook, which remains clouded by the war in Ukraine, and its effect on agricultural and energy prices.

Mhairi MacLeod (pictured above left), the principal broker and managing director of Astute Ability Finance Group, said the June rate rise had both positive and negative implications for borrowers.

Prior to May 2022, the last rate rise was in November 2010, meaning there were a “whole generation” of borrowers who had yet to encounter an interest rate rise, MacLeod said. But brokers have been able to prepare borrowers for higher rates, and their ability to service them has been tested. 

Overall, borrowers that have used brokers are better positioned to weather the storm of both cost of living and interest rate increases, MacLeod said.

“Due to responsible lending, a lot of brokers have already positioned their clients for rate increases, which is proven in the fact that [brokers] now have 69.5% share of all residential home loans,” MacLeod said.

The rising cost of living, exacerbated by supply chain disruptions, was a key contributor to financial stress for households, MacLeod said.  In hiking the cash rate, the RBA couldn’t be held accountable for borrowers coming under financial pressure.

“Brokers having good conversations with clients over the last few years while we’ve had a good run, have positioned our clients a lot better,” MacLeod said.

“It’s now up to brokers to have broader conversations with their clients (how they’re going and what does it look like) and do they need to go back and revisit those who refinanced prior to the pandemic.”

Read more: Has rampant inflation pushed up interest rates?

Paul Ryan (pictured above), economist at PropTrack, the property data arm of REA Group, which owns Mortgage Choice and Smartline, said Tuesday’s “larger than ‘business-as-usual’ hike” indicates the RBA had become increasingly concerned about domestic inflationary pressures, using the rate rise as a measure to get them under control quickly.  

He said higher interest rate expectations have weighed on housing price growth across the country this year. Buyers are likely to exercise caution around the cash rate increase, which is likely to impact sentiment.

More interest rate increases are expected over 2022, as inflation has been higher than anticipated by the RBA, Ryan said. But just how high interest rates will be at the end of the year is a key source of uncertainty for the housing market.

“Financial markets have priced in a cash rate two-percentage points higher at the end of the year, which would raise mortgage repayments by another 24%. Major bank forecasters, however, do not view it likely the RBA will increase rates this quickly, predicting rate rises closer to half that much,” Ryan said.

Mortgage Choice national sales director David Zammit (pictured above) said in a rising rate environment, it becomes increasingly important to have a mortgage broker advocating for borrowers ‘interests.

Mortgage Choice home loan submission data showed a slight increase in the proportion of borrowers choosing to refinance, from 38% in April, to 41% in May.  The data didn’t account for the large number of customers able to get a better deal with their existing lender following negotiations by their broker as part of their annual home loan review, he said.

“Mortgage Choice loan submission data shows that demand for fixed rates fell again in April to the lowest level in over two years. The overwhelming majority of borrowers are opting for a variable rate loan and only 10% of loans had a fixed component,” Zammit said.

He urged borrowers and prospective buyers to speak to a broker to ensure they were getting the right home loan for their needs.

“Interest rates may be rising but there are still some great deals in the market and your broker can help you find them,” Zammit said.

Read more: 55% of borrowers unsure of home loan rate, says Mortgage Choice

As central banks around the world grapple to curb inflation, RateCity.com.au research director Sally Tindall (pictured above right), said she had expected the RBA to deliver a bigger hike than usual.

If lenders pass on the 50-basis point hike in full, for the average borrower owing $500,000 over 25 years , it would equate to a $133 monthly increase in the cost of repayments, Tindall said.  With May and June hikes combined, their repayments would rise by $197.

With more hikes expected, Tindall said it would be important for brokers and their clients to take a big picture view, on the cost of repayments and act accordingly. 

RateCity.com.au estimates show around 38% of borrowers are currently on a fixed rate, Tindall said.  This was based on big four bank half-yearly results, which showed the percentage of loan books on fixed rates, and that the peak fixing period for borrowers was July to December 2021, she said.

The data indicates a large pool of borrowers won’t feel the pinch of rising rates until their mortgages roll off onto variable rates from mid-to-late 2023.

“There’s a lot of people still out there paying under 2% ... when they do come off, there will be big price correction,” Tindall said.

Read more: Is another cash rate rise on the cards?

Tindall suggested looking at options to refinance for some rate relief – or renegotiating with a current lender.

“Banks are still falling over themselves to offer discounts to new business, particularly for ideal customers with a steady job and a good track record of paying down their debt,” she said.

RateCity.com.au data showed the lowest variable rate for owner-occupiers paying principal and interest (available for deposits of 40% or more), was 1.94%, available through Reduce Home Loans.  The lowest two-year fixed was 3.19%, available through Orange Credit Union.

While the double-edged sword of rate rises was generally considered a benefit for savers, Tindall said while banks were quick to hike home loan rates in May, two in five left savings rates unchanged.

“While the average big four bank ongoing savings rate is 0.41%, the highest rate for all adults is 1.6% from Virgin Money, while young adults can get up to 3% from BOQ,” Tindall said.

Lenders are expected to pass on the cash rate increase swiftly to home loan customers, resulting in increases in variable rates over the coming days.

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