RBA passes on largest cash rate increase since 2000
Interest rates are now back to pre-COVID levels following the Reserve Bank's decision to lift the official cash rate by 50 basis points to 0.85% at its June board meeting.
The increase is not only the second in as many months, it's the largest made by the central bank in over 22 years when it hiked rates by 50 basis points from 5.00% to 5.50% in February 2000.
Reserve Bank Governor Philip Lowe emphasised in his monetary policy statement that the substantial increase would help bring inflation back down to the bank's target range of 2-3% over time.
"Today's increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic."
"The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead."
The return to 'normal'
With two consecutive rate rises now cemented in, the next questions on many minds will be how far interest rates have left to climb, and how long it will take them to reach a peak.
Following the RBA's May rate meeting, Governor Lowe indicated that the official cash rate could hit a "more normal level" of 2.50% over the period ahead. Though he didn't highlight an explicit figure in his monetary policy statement today, Lowe once again emphasised the "normalising" of conditions.
Only 39% of the economists and experts polled as part of Finder's latest RBA Cash Rate Survey currently believe that interest rates will peak at 2.50% or higher though. Instead, there is more of a consensus around the matter of when rates will peak, as 71% of experts believe they will do so at some point in 2023.
David Robertson, head of economic and markets research at Bendigo Bank, says the climb back to normal will be a relatively steady process.
"The RBA is very likely to increase rates in 0.25% increments steadily over the next nine months until we approach a cash rate of around 2.00%. They will be careful not to overshoot with policy tightening and risk a hard landing, but inflation will rise further due to supply issues, so they have more work to do."
Mortgage repayments add to cost of living stress
Though home loan interest rates remain relatively low in a historical sense, the considerable loan sizes that many borrowers have been required to take out to enter the property market in recent years means that any rate increase will be keenly felt.
Rising home loan repayments are hardly going to be celebrated even at the best of times, but this extra expense is likely to come as a particularly unwelcome hit to the many households that are already struggling with higher than usual prices for food, petrol and energy.
On a $500,000 loan with 20 years left to pay and an existing variable rate of 3.00%, today's 50 basis point rate rise would equate to $127 more in monthly repayments if it was passed on in full by a lender.
And the picture will look even dimmer if the cash rate does keep heading up. A number crunch conducted by Finder found that if official interest rates do hit the 2.50% mark in the near future the monthly repayments made by an average homeowner would be $716 higher than they currently, or roughly $8,500 a year more.
"Many homeowners are going to struggle to meet these new payment requirements. If you are at risk, it might be worth locking in a low fixed rate now, before rates rise further," says Finder's head of consumer research, Graham Cooke.
Banks slow to lift savings rates
Bad news for mortgage holders would typically translate to some much-needed good news for savers by way of rising savings account rates, but has that played out so far?
Since the RBA's May meeting, 55 banks being tracked by financial comparison website Mozo have made 138 increases to savings account rates. However, the average rate in Mozo's database is only 17 basis points higher than it was before May, suggesting that many banks have not increased their rates in line with the Reserve Bank.
Highest ongoing savings account rates
|Bank||Savings account||Ongoing rate|
|Great Southern Bank||Goal Saver||1.40%|
|AMP||AMP Saver Account||1.35%|
|MOVE Bank||Growth Saver||1.35%|
Source: Mozo database, June 6, 2022. Rates available to adults over the age of 18 and monthly account requirements may apply.
Banks seem to have been more inclined to lift their term deposit rates though, as Mozo's database has recorded 563 increases in term deposit rates over the past month. As a result, a handful of one-year term deposit rates are now edging towards the 3.00% mark.
"There's still not a lot of good news around for the nation's savers with ongoing rates on some of the most popular savings accounts failing to fire," says Mozo spokesperson Tom Godfrey.
"At a time when cost of living pressures continue to hit home, if you're trying to get a return on your cash your best bet might be to consider a term deposit as at-call savings account rates are not showing many signs of life."
With the Reserve Bank's latest 50 basis point increase, there will be strong expectations among Australian savers for banks to up their savings account and term deposit rates even further in the weeks to come.
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