RBA decision tips official cash rate over 4%

Non-bank, broker react to June rise

RBA decision tips official cash rate over 4%

The official cash rate has gone up by 0.25%, the Reserve Bank of Australia has confirmed.

The wholesale interest rate has increased to 4.10% and the interest rate on exchange settlement balances has increased to 4%.

The unexpected move defies many predictions, economists from CBA, ANZ, NAB and Westpac telling MPA ahead of the RBA decision that they had forecast no change in June.

RBA governor Philip Lowe said on Tuesday that the board recognised that inflation had passed its peak, but at 7%, was still “too high”.

Current monthly ABS figures show inflation rose 6.8% in the 12 months to April,  (6.5% with items such as fuel, removed).

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” Lowe said.

The board said it was still seeking to “keep the economy on an even keel” as inflation returns to its target range of 2% to 3%. Household consumption continued to be a source of uncertainty, the board said, noting that the combination of higher interest rates and cost of living pressures was leading to a “substantial slowing in household spending”.  While some households had substantial savings buffers, others were experiencing a “painful squeeze” on their finances, it said.

Tuesday’s decision follows a 0.25% hike in May and marks four percentage points of official cash rate increases in just over 12 months.

James Angus (pictured above left), chief customer officer at Bluestone Home Loans, said he expected the June hike to mark the turning point for interest rates.

Noting that interest rates had climbed by 4% in just over 12 months, Angus said it was great to see a sign of what looked to be a turning point in the current hiking cycle. 

“Anyone who studies economics knows monetary policy works slowly, but it is hard to comprehend the impact of a 4% increase in interest rates on every aspect of our economy,”  Angus said.

With winter setting in and power bills expected to rise, Angus said it was a “tough call” on households and businesses.  He noted that tens of thousands of borrowers moving off a significantly lower 2% fixed rate loan would be moving to a variable rate in the high 5% or low 6% range.

“It isn't very comforting to know that many households can't pay their home loan repayments and essential living expenses,” Angus said. ”As a lender, we are all too aware of the impact higher rates have on affordability, consumer sentiment, property prices and the appetite from buyers and sellers to return to the market.”

Nicole Cannon (pictured above right), director at Sydney-based brokerage Pink Finance, said the June rise was unexpected.    

Clients who had the opportunity to save extra money when interest rates were low were now eating into their savings buffers, she said.  

“They’re at the point where they’ve been able to get by, by using cash reserves they’d saved, but that’s now starting to dwindle and create some stress,” Cannon said.

Borrowers currently on fixed rates are still preparing for higher repayments when their fixed rate rolls over. While high net worth clients are likely to be able to manage the increase by cutting back on their discretionary spending, Cannon said that an increasing number of her clients were already concerned by a $400 to $500 rise in their weekly repayments and were looking for solutions to mitigate it.

Pink Finance is proactively helping clients on fixed mortgage rates to prepare for the impact of higher interest rates, she said.

“What we’re saying to our clients is ‘just speak up’ … the key is just to have a conversation,” Cannon said.

At the start of the year, Pink Finance had a client who was starting to drown financially, she said. As part of the solution, the brokerage refinanced the loan with an additional $25,000 of lending (noting that borrowing was still under 50% of their property value), while keeping the existing loan term.

“It enabled them to pay out their car loan, clear their credit card … we got them onto a cheaper rate, and we saved them $1200 a month,” Cannon said. “They never thought that was possible: it just gave them so much relief.”

Although the June rise represents a blow for borrowers, Cannon said that brokers were in an ideal position to use their knowledge and experience to identify solutions, helping their clients to save money and give them peace of mind.

“Borrowers don’t always know what options are out there and that’s what we’re here for,” she said.