RBA makes it nine in a row as interest rates keep soaring

The Reserve Bank of Australia (RBA) has surprised few but unsettled many with its ninth consecutive monthly interest rate rise, this time by 0.25 cent.

The February rate rise takes the official cash rate to 3.35 per cent, with the banks sure to follow promptly in lifting their lending rates.

The average variable mortgage rate in Australia in is now 5.78 per cent.

Given it averaged 6.88 per cent from 1990 until 2023, there would still appear to be plenty of scope for the RBA to make it ten out of ten next month as it adheres to its mantra of attacking rampant inflation.

Average variable interest rates reached an all-time high of 15.50 per cent in September 1990 and a record low of 2.14 Percent in March 2021.

This month’s rate hike was widely expected but will still hit borrowers hard.

The Board expects that further increases in interest rates will be needed over the months ahead.

- Philip Lowe, Governor, Reserve Bank of Australia

In the Finder RBA Cash Rate Survey, 44 experts and economists weighed in on future cash rate moves and other issues relating to the state of the economy.

Almost all panellists (95 per cent, 42/44) predicted a cash rate rise in February, with the majority (91 per cent, 40/44) correctly forecasting the increase of 25 basis points – bringing it to 3.35 per cent in February.

The panel forecast that the cash rate will peak on average at 3.75 per cent, with three quarters of those who weighed in saying it will peak in the first half of 2023.

Inflation ensures more borrower pain ahead

RBA Governor Philip Lowe continued to blame an inflation rate of 7.8 per cent as the culprit for the relentless series of rate hikes.

“Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy,” Mr Lowe said in the Monetary Policy Decision issued today (7 February).

The RBA boss left little doubt that the worst was still to come for households with a home loan and tightly stretched budget reeling from flatlining wages being eroded by high inflation.

“The (RBA) Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and 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.”

The irony for workers is that any wage increases will only be seen as further fuelling inflation, and therefore interest rates.

“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,” Mr Lowe said.

“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.”

He addressed the call from many quarters that the cycle of interest rate rises should pause to allow time to analyse their effect on the economy.

“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.

“There is uncertainty around the timing and extent of the expected slowdown in household spending.

“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.

“Household balance sheets are also being affected by the decline in housing prices, while another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world.

“These uncertainties mean that there are a range of potential scenarios for the Australian economy.”

How much will the new rate cost?

This quarter of a per cent hike takes means that since May 2022 the rate has increased by 3.25 per cent, from its emergency low of just 0.15 per cent.

Banks have been quick to pass on the higher rate to borrowers, even if far slower than to savers, with 52 lenders having passed on all rate hikes in full last year

The average variable interest rate according to comparison site Mozo could rise to 5.93 per cent after the rate hike.

Borrowers now need to find an extra $91 a month on a $600,000 loan, or $1,092 per year. The average mortgage size in November 2022 was $604,346 up from $594,938 in the previous month.

Average Aussie mortgage repayments

Source: Finder, RBA. *Owner-occupier variable discounted rate. Repayments based on the average loan of $601,793 (ABS data analysed by Finder).

Nerida Conisbee, Chief Economist, Ray White Group, said that while this is unlikely to be last rate rise, a string of economic indicators suggested the peak was not far off.

She pointed out that construction costs continue to be the biggest component of the strong inflation numbers but expects them to ease as oil prices rescind and supply chains start moving smoothly again.

“The Baltic Dry index (which measures the cost of shipping goods worldwide and is calculated on a daily basis) hit a peak in early October 2021 as the easing of COVID-19 restrictions kick started the world economy.

“Since then, shipping costs have come down 85 per cent.

“This reduction will lead to lower inflation this year,” Ms Conisbee said.

She also cited retail trade falling for the first time in over a year as a sign that interest rate hikes were at last making an impact, while an easing in US inflation was also a possible portent of what might unfold in Australia.

Theo Chambers, CEO of brokerage Shore Financial, also drew comparisons with the local and US economies.

“We're still seeing inflation quite high locally, with data from last quarter showing that inflation is still rising.

“In the US, we're starting to see inflation come down, falling from 9.1% to 6.5% for the 12 months ending December 2022, which shows rate rises have taken effect.

“Unemployment in both countries is still quite low, however, we are expecting to see that change amid this higher interest rate environment.”