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RECAP: Homeowners hit with fourth rate whack from RBA as Lowe struggles to tame rising inflation

The West Australian
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Homeowners already struggling with the rising cost of living have been told the Reserve Bank’s latest interest rate hike won’t be the last.
Camera IconHomeowners already struggling with the rising cost of living have been told the Reserve Bank’s latest interest rate hike won’t be the last. Credit: TheWest

And that’s a wrap!

The Reserve Bank of Australia has, as expected, lifted the official cash rate by 50 basis-points to 1.85 per cent.

In a sign of just how much the economic landscape has changed this year, that is a far cry from the record low rate of 0.1 per cent that saw Australia through the worst of the COVID pandemic . . . and only changed in May this year when the central bank was forced to act on rampant inflation.

It means those with a $500,000 mortgage and another 25 years to run on the loan will — when the banks inevitably pass on the full hit — have had to find an extra $472 in monthly repayments.

The RBA says this could be enough to rein in spending and keep a lid on inflation. Some experts aren’t so sure, with other global factors also at play, namely China and Russia’s invasion of the Ukraine.

But in a silver lining, the cash rate increase could encourage more savers, including retirees, hunting higher returns to switch back to term deposits.

Read the feed below to see what happened, when and what it means for you.

Thanks for joining us, and don’t miss all the analysis from Tuesday’s historic move on rates in Wednesday’s The West Australian and thewest.com.au.

Adrian Lowe

Cooling property may slow rates

On the other hand, HSBC chief economist Paul Bloxham expects smaller hikes from here given slowing consumer spending, the cooling housing market in Sydney, Melbourne, Brisbane, Hobart and Canberra and global down turn will worsen.

Couple buying a house with a real estate agent
Camera IconWhat next for the property market? Credit: andresr/Getty Images

“If history is a good guide, the RBA tends not to increase its cash rate when the unemployment rate is rising. If it turns out to be right, this forecast would imply that rates are unlikely to rise further next year,” he said.

“If that’s the case, the remaining discussion may be about how many hikes are to come this year and at what pace.”

Adrian Lowe

Is the RBA heading into a year of calm?

JP Morgan Asset Management global market strategist Kerry Craig said it appeared the RBA was aware of the domestic and international economic drags.

“We expect the RBA will continue to push interest rates back to a neutral level this year given the successive upgrades to the inflation outlook but 2023 looks to be a much less eventful year for the RBA,” he said.

“The uncertain mix between growth and central bank policy is a reason to expect choppy markets in the coming weeks, until there is clear evidence of either a more sustained slowing in economic activity or in inflationary pressures.”

Adrian Lowe

Don’t expect a return to 25bp hikes any time soon

Deutsche Bank Australia economist Phil O’Donaghoe said while Dr Lowe has previously suggested 25 basis point increases are a more normal path, a return to that level isn’t likely soon.

“Quite simply: the prospect of more modest rate increases will reduce the tendency for precautionary household saving, leaving consumption more resilient than it otherwise would be, adding further fuel to demand-side inflationary pressures,” he said.

More rewards on way for savers

Amid all the talk of mortgage gloom, it’s easy to forget that there are some winners from interest rate rises, including long-suffering savers who struggled for returns when the offical cash rate sat at a record-low 0.1 per cent for months on end.

While there’s a range of caveats and conditions to be met for some accounts, there may now be good reason for some pre- and post-retirees (and plenty of young savers) to shift money into term deposits.

Sitting pretty, a lifetime of careful saving leading to healthy pension for old age. Figurines of a senior couple sitting on top of a model piggy bank.
Camera IconNow might be the time to look again at term deposits. Credit: Peter Dazeley/Getty Images

According to Canstar, Bank of Queensland, Westpac, Rabobank Australia, ING and Australian Unity now offer deposit rates of between 2.60 and 3 per cent.

It could be worth shopping around to see if you can make your hard-earned cash work harder.

Adrian Lowe

The RBA’s great balancing act

Moody’s Analytics economist Harry Murphy Cruise said measures of consumer confidence were dropping just as fast as record low unemployment numbers.

“The fear is that the loss of confidence could send households to the hills, denting spending and weakening domestic demand,” he said.

“Yes, the RBA is hiking rates to achieve just that. But the lag between hikes and changes in household behaviour means the RBA has a difficult job evaluating the impact of its work.”

Adrian Lowe

Rising debt pile means we’re now more sensitive to interest rate hikes

KPMG chief economist Brendan Rynne has pointed out there are major differences in the impact of the 1990s rate tightening cycle and now.

“At that time household debt as a proportion of household income was around 80 per cent - now it is hovering around 190 per cent,” he said.

“This difference in household debt levels means that consumers are much more sensitive to interest rate movements today compared to 20 or 30 years ago.”

What if increasing rates doesn’t work to rein in inflation?

The Reserve Bank of Australia has made history in raising interest rates for the fourth consecutive month.

The half a percentage point hike has taken the cash rate to a six-year high of 1.85 per cent, which Treasurer Jim Chalmers said will make life harder.

Research director with finance comparison website RateCity, Sally Tindall, spoke to The West Live’s Ben O’Shea to explain ...

The fixed-rate party has to end some time

Look around you - it’ll be easy to spot those who fixed their mortgage rates just before the first round of RBA rises in May.

These people will have big smiles on their faces, safe in the knowledge that Tuesday’s 50bp increase that the banks are certain to pass on will bother them not one jot.

But, as anyone who’s stumbled out of a darkened Hip-E Club and into a blazing dawn sunrise will tell you - the party can’t last forever.

Rest assured, there’s a very important group of people gearing up to nurse the inevitable hangovers when this period of respite gives way to a very different new rate.

The West’s Your Money expert Nick Bruining wrote last month that financial counsellors were urging borrowers to stay on top of their cash flow and to seek advice from WA’s network of free support services if they are starting to struggle.

These counsellors are bracing for the worst when people who fixed rates at historical lows over the past year or two are re-set to prevailing variable rates when the fixed term ends.

It’ll be enough to turn a smile upside down ... and creat a massive financial problem if those who did fix don’t start to prepare now for vastly higher repayments when the party ends.

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