RBA delivers fifth straight rate hike in September

After five consecutive hikes to the cash rate, and further hikes forecast, a leading economists says this tightening cycle will hurt borrowers more than previous ones.

The Reserve Bank of Australia lifted the cash rate by another 50 basis points at its September meeting, taking it to 2.35%.

Until early May, the cash rate was just 0.1%.

The RBA has raised the cash rate from 0.1% to 2.35% since May. Picture: Getty

While this rate hiking cycle isn’t as large as the rate hiking cycle of 1994, Judo Bank economic adviser Warren Hogan said the financial hit to the average mortgage holder will be larger, because houses cost much more than they used to, and households hold much more debt.

Mr Hogan said his calculations – which are based on mortgage interest repayment data from the Australian Bureau of Statistics – show mortgage holders will soon fork out a record amount in interest repayments.

“So to give you an idea, [total interest repayments] were around $10 billion in the first quarter of this year,” Mr Hogan told Mortgage Choice.

“My calculation has that number rising to over $20 billion by the first quarter of 2023,” he said. “So in one year, it’ll have doubled and that’s never happened before.”

In early 2022, the cash rate was sitting at a record low of 0.1%, allowing borrowers to take on larger amounts of debt. Australia

More hikes forecast

The official cash rate is now at the at the highest level since early 2015, and RBA governor Philip Lowe has indicated we should expect more increases from here.

“The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy,” Mr Lowe said in a statement following Tuesday’s RBA decision.

“The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path.”

However, the size and speed of the rate hikes may soon slow, with some economists forecasting this could be the last of the larger-than-usual 50 basis point hikes.

CBA and Westpac expect we’ll see a ‘business as usual’ hike of 0.25% at the October meeting.

Gareth Aird, head of Australian economics at CBA said there were some ‘key shifts’ in the Governor’s statement following the September meeting that indicate a slowdown of the hiking cycle is imminent.

One of those was Mr Lowe’s acknowledgement that the full effects of higher interest rates are yet to be felt in mortgage payments.

Each RBA rate hike can take 2-3 months to flow through to mortgage repayments. Picture: realestate.com.au

CBA estimates a two to three month lag between each RBA rate hike and when borrowers on variable rate mortgages experience an increase in their home loan repayments.

“Home borrowers have barely felt the impact of the RBA’s rapid tightening since 4 May from a cash flow perspective,” Mr Aird said.

Mr Aird noted that lag largely explains why official spending data remains strong but consumer sentiment is poor.

Spring selling season in focus

The RBA takes a wide range of economic data into account before deciding where to set the cash rate.

Warren Hogan said the RBA board will be watching the typically busy spring selling season closely.

“If something significant happens, that is either a very strong selling season or a very weak one, that might influence their decisions over the next few months,” Mr Hogan said.

Interest rates are expected to keep rising through the spring selling season. Picture: Getty

Consecutive rate hikes over the past five months have significantly reduced the maximum borrowing capacity of would-be buyers and house prices have already started to fall.

The latest PropTrack Home Price Index shows property prices have fallen 2.7% nationally from their peak in March.

PropTrack senior economist Eleanor Creagh said this spring is set to be much less competitive than last.

“There’s a lot more choice and less urgency, which could create opportunity for some,” Ms Creagh said.

“The balance in market conditions could make it easier to get into the market as stock isn’t moving as quickly and the fear of missing out has subsided,” she said.

“For sellers, though prices are dropping and properties are taking longer to sell, prices are still up on pre-pandemic levels and selling quicker than before the pandemic onset.”