Cash rate rises to 3.10%; highest level since 2012

• The rise takes the cash rate to 3.1%, its highest rate in 10 years
• The impact of the 0.25% rise is much softer compared to the 0.5% rises seen in previous months
• Data shows that fewer Australians are refinancing

In an unsurprising move, the Reserve Bank of Australia (RBA) has lifted the cash rate for the eighth month in a row from 2.85% to 3.10%. This increase takes the cash rate to its highest level since 2012

This 0.25% rise reflects what occurred last month, and is a far cry from the steep 0.5% rises seen in the several months before that, amid inflation showing some signs of slowing.

Nonetheless, inflation is still increasing well above the central bank’s 2-3% target.

“Inflation in Australia is too high, at 6.9 per cent over the year to October,” said RBA Governor Philip Lowe in his post-meeting statement.

Dr Lowe warned that a further rise in inflation is expected over the short term, to around 8%.

“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand,” he said.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”

Dr Lowe reiterated that the Board of the RBA will do what is necessary to return inflation to its target range.

Some good news

Despite the rate rise, there was some good news from today’s announcements.

The economy is growing solidly, although growth is expected to moderate over the year ahead due to a global economic slowdown.

Unemployment also remains very low.

“The labour market remains very tight, with many firms having difficulty hiring workers,” noted Dr Lowe.

“The unemployment rate declined to 3.4 per cent in October, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, although they have declined a little recently.

“Employment growth has also slowed as spare capacity in the labour market is absorbed. Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation.”

Slowdown in rate rises to continue

Konark Saxena, Associate Professor in the School of Banking and Finance at UNSW Business School, said the Reserve Bank is likely to signal a slowdown in interest rates thanks to three pieces of news: mortgage distress is expected to increase; commodity prices are expected to soften due to an overall global slowdown, and wages are not rising at a level to offset inflation.

Eleanor Creagh, PropTrack Senior Economist, said that the rate rises – the fastest since the 1990s – are unlikely to stop soon, with borrowing costs expected to increase further and maximum borrowing capacities to be reduced, shrinking the budgets of buyers.

“Now the cash rate is sitting at 3.10% after a substantial 300 basis points of tightening to date, maximum borrowing capacities have dropped by more than 20%. The significant reduction in borrowing capacities implies further price falls,” she said.

“It will take time for higher interest rates to fully affect home prices, so prices are likely to continue to fall as interest rates continue to rise.

“However, if interest rates peak in 2023, price falls are likely to ease, with values stabilising as interest rate uncertainty reduces.

Eleanor Creagh, PropTrack Senior Economist

“The downward pressure from rate rises will be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and over the long run, housing supply pressures.”

Loyalty doesn’t pay

According to Canstar analysis, the interest rate data shows that existing customers could be unintentionally gifting the banks $155 more per month than new customers. This amount is based on a $500,000 principal and interest loan.

RBA owner-occupier variable housing rates

The analysis found that borrowers faced an extraordinary 38% increase in home loan repayments from April to November. To those on a $500,000 loan, this would equate to an extra $809 on monthly repayments.

Despite this, Lending Indicators data from the ABS shows that borrowers have so far pulled the reins on refinancing to a new lender. Refinancing to a new lender fell in October by 1%, with less than $18 billion in loans refinanced.

However, this activity is 9.7% higher than the same time last year – although, of course, the cash rate remained at its ultra-low level of 0.1% for all of 2021 – but trails behind a 4.2% rise in August when $18.57 billion of loans were refinanced.

Source – Canstar

“Aussie homeowners need to be looking at their rate and checking it twice this Christmas, otherwise they could end up paying thousands of dollars in extra interest over the life of their loan unnecessarily,” said Stephen Zeller, Compare the Market’s General Manager. 

“Those who don’t ask, won’t receive.

“Those on a fixed, or a climbing variable rate, need to wake up and act, especially with a large portion of fixed rates due to expire mid-next year.

“The rude reality is that fixed rates which are due to expire at the end of 2023 can expect a median increase of around $650 in their monthly repayments.

“It would be a good idea to start talking with your lender a couple of months before your fixed rate is due to end – just to see what the options are. If you’re not happy with the options available, you’ve got to shop around.

“There are plenty of deals out there, plenty of cash back offers to entice people across so you need to do your research and decide what’s best in terms of products and features. 

“It’s not just about a cheap rate anymore, there are some great features available, but we know that generally, 95% of borrowers just want a basic home loan, they aren’t after those bells and whistles.”

Tough Christmas

There’s a risk that thousands of home owners could get locked in an avoidable mortgage prison, said Lance Goodman, CEO of Compare Club.

“We’ve been telling homeowners on variable rates to move quickly in finding a more affordable mortgage for several months, and this has never been more urgent,” he said.

“There isn’t long until Christmas so anybody who needs to lower the mortgage needs to speak to a broker today to have a chance of settling before the lenders shut down for the holidays.

“Otherwise there’s a real risk that the RBA will raise rates again at the start of January, adding even more money to monthly payments and reducing the amount that homeowners can borrow.

“There’s also a significant number of fixed rate mortgage holders whose ultra low mortgage rates are set to expire over the coming months and may struggle to find an affordable rate.

“If your loan is expiring in the next two months, reach out to a broker this side of Christmas and start getting your finances in order. If it’s already expired or your variable rate is getting uncomfortable, act now.”