Investors who thought the Reserve Bank of Australia was done hiking interest rates were in for a big shock yesterday, with the nation’s central bank deciding to resume tightening monetary policy.
After four straight meetings where the RBA kept the official cash rate on hold, policymakers decided to lift the benchmark rate by 25 basis points to 4.35%.
In total, there have now been 13 interest rate hikes since the central bank first lifted the cash rate from the emergency-level setting of 0.1% that was maintained throughout the pandemic.
Although the hike followed an extended pause, it didn’t exactly shock experienced observers.
It may have been the first real challenge for new RBA Governor Michele Bullock, but just about every credible economist in the country had anticipated the RBA to lift the cash rate, which followed a series of reports that paved the way for action.
For starters, the last quarterly inflation reading surprised to the upside, clocking in at 5.4% on an annual basis. More importantly, the RBA’s preferred gauge for inflation, the trimmed mean figure, exceeded forecasts at 5.2%, and accelerated from 1% to 1.2% in the September quarter.
Quite explicitly, policymakers made it clear inflation is still far too high, and also more persistent than expected.
The International Monetary Fund (IMF) even weighed into this matter last week, voicing its own opinion that Australia is behind the eight-ball in dealing with inflation. It also called on the RBA to hike rates as the timeline to bring inflation back into the RBA’s target range could slip.
Meanwhile, house prices are still marching higher, retail sales also came in hotter-than-expected, and the jobs market has remained incredibly resilient, with little signs thus far that unemployment is about to take off.
Where to next for interest rates?
In the statement accompanying the RBA’s November interest rate decision, the wording surrounding the future direction of monetary policy was softened a touch.
Instead of suggesting “some further tightening of monetary policy may be required”, the bank’s view is now “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks”.
And while some experts downplay the role higher interest rates will have in addressing soaring insurance premiums or rents, it is the services segment that the RBA has squarely in its sights.
The central bank revised its forecasts for inflation, with figureheads now expecting inflation to reach 3.5% by the end of 2024, rather than 3.3%. The RBA still sees inflation meeting the top of its 2-3% target range by the end of 2025.
A positive, however, is that Bullock now believes unemployment will not rise as high as anticipated over the next 18 months, instead peaking at 4.25% versus 4.5%.
With the hurdle for future rate hikes sitting firmly higher, it seems the RBA is reluctant to tighten monetary policy.
It would now be a shock if December came into play as far as another hike, so the more likely situation is that inflation data will be watched closely until February, which could be the next ‘live’ meeting for any change in tack.
What’s clear is that the RBA is out of sync with global banks, it is an outlier that was among the last to initially act, and potentially the last major central bank to finish tightening.
Increasing home loan repayments
In light of the latest hike, borrowers making principal and interest repayments against an ‘average’ variable rate home loan on a 25-year timeframe now face an increase in monthly repayments similar to the below:
$500,000 mortgage: $1,210 more since the start of the rate hike cycle
$750,000 mortgage: $1,815 more since the start of the rate hike cycle
$1,000,000 mortgage: $2,420 more since the start of the rate hike cycle
Comments