Reserve Bank makes first Melbourne Cup Day cash rate rise since 2010

• The Reserve Bank (RBA) has lifted the rate to 2.85%
• There have been calls for a more 'gentler' course of monetary tightening
• The rate rises are well above the 2% buffer lenders were using a year ago

As expected the Reserve Bank of Australia (RBA) has lifted the cash rate to 2.85%.

Along with being the seventh consecutive monthly cash rate increase in a row, today’s decision marks the first cash rate rise on a Melbourne Cup Day in 12 years.

In his post-meeting statement, RBA Governor Philip Lowe rather bluntly said inflation in Australia “is too high”.

“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades,” he said.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.

“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.

In grim news for borrowers, especially those who have heavily leveraged, Dr Lowe ahs warned that the RBA Board expects further rates.

“(We are) closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Some good…

Dr Lowe did note that the economy is still grown solidly, with income being boosted by a record level of the terms of trade. This growth is expected to moderate over the year due to a slowdown in the global economy. This is expected to take the heat off inflation.

Notably, unemployment still remains low; the 3.5% unemployment rate is the lowest in almost 50 years, and well below the 5% target which is generally considered to reflect ‘full employment’ in an economy.

“Job vacancies and job ads are both at very high levels, although employment growth has slowed over recent months as spare capacity in the labour market has been absorbed,” he said.

“The central forecast is for the unemployment rate to remain around its current level over the months ahead, but to increase gradually to a little above 4 per cent in 2024 as economic growth slows.”

Wages are also on the up too, albeit at a slow rate.

“(Wages) remain lower than in many other advanced economies. A further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.”

Attention turning to rate rise reprieve

Following today’s decision, attention is now being drawn to when there will be a reprieve in the rate rise.

Yesterday, Tim McKibbin, CEO of REINSW, called for governments and bodies such as the RBA to steer a “cleaner, gentler course”.

“Looking forward, it would be advantageous for consumers and the market to no longer be subjected to drastic economic reactions like the volley of rate rises we’ve been subjected to since mid-year,” he said.

Effie Zahos, Canstar’s Editor-at-Large and money expert, warned that given the Reserve Bank’s obligation of bringing inflation under control to 2-3% per annum, it means the Australian public are a long way from seeing lower prices at the fuel pump or checkout.

“The government is forecasting annual inflation to peak at 7.75% before the end of this year, the rate is already sitting at 7.3%. With energy bills spiking next year and floods adding to grocery price hikes, you can expect this number to come in higher than forecasted,” she said.

“The big four banks have revised their cash rate forecasts following the October inflation figures and are forecasting rates could rise by a further 1.25% by March next year.

Effie Zahos, Canstar’s Editor-at-Large and money expert

“Higher interest rates, slow wage growth and rising unemployment will put a dent in inflation but it also means there’s more pain ahead for households and businesses.”

What to expect from interest rates rises

Before today’s announcement, the cash rate had already risen by 2.5%, equivalent to the serviceability buffer banks were applying to loan applications this time last year, although it has now risen to 3%.

“If you took out a loan before October last year, it’s likely you’ll be feeling the pinch more than others,” continued Mr Zahos.

“Every rate hike from this month onwards will be a direct hit to your household’s budget bottom line. The serviceability buffer that banks would have assessed you on has now been fully absorbed by the six rate hikes. Each repayment now has not been factored into households’ serviceability.

“If the Reserve Bank sticks to a 0.25 percentage point increase each time in November and December, the cash rate could be sitting at 3.1 percent by the end of the year. This will add $889 to monthly repayments on a $500,000 loan 30 years since the first rate rise this year in May. If you’ve got a $1 million debt this figure blows out to $1,779. “

Industry response to latest rate rise

Theo Chambers, CEO of Sydney-based mortgage brokerage Shore Financial, noted that the market was expecting a 0.25%, so the news is not surprising.

“The expected outcome is that people’s borrowing power will continue to be reduced. Consumer spending is still quite high at the moment, which is keeping inflation high, recently reaching the 7% mark in Australia,” said Mr Chambers.

“As for other likely outcomes, unemployment is now forecast to start increasing as rates continue to rise, and could reach 4.5% in 2023. This can be put down to the fact that once consumer spending starts decreasing and inflation subsequently starts decreasing, the global economy will probably retract a little bit.

“As a result, businesses will feel less revenue and profits will fall, leaving many in a situation where they may have no choice but to lay off some staff as they go into cost-cutting mode.”