Reserve Bank hikes cash rate to 2.35%


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Australian homeowners with a mortgage are in for yet another round of repayment increases following the Reserve Bank of Australia's (RBA) decision to lift interest rates by a further 50 basis points at its September board meeting this afternoon.

This was the fifth straight hike made by the central bank, meaning that the official cash rate is now sitting at 2.35% - the highest level it's been since December 2014 and a far cry from its historic low of 0.10% from earlier in the year.

In what has become a norm in recent months, RBA governor Philip Lowe once again reinforced the Reserve Bank's desire to rein in inflation to a more normal level of 2-3%.

rba raises interest rates at september meeting

"Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead. Global factors explain much of the increase in inflation, but domestic factors are also playing a role. There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy."

"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."

Lowe also acknowledged that the recent rate increases have added to the financial stress of many borrowers, and would likely continue to do so in the near future.

"An important source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments."

How are rate rises impacting our finances?

While much of the focus of the rapid increase in interest rates over the last few months has been centered on the impact to mortgage holders, a recent survey conducted by Canstar suggests that many Australians have been largely unaffected.

44% of respondents reported that they hadn't experienced any change in their financial situation so far and that any future interest rate hikes were unlikely to alter that. Meanwhile, a further 11% said that rising interest rates were actually proving a positive for their savings balances which, in turn, was helping them offset rising living costs.

That's not to say that Australians with a home loan haven't been hit by rising rates though. 11% of those surveyed revealed that they were going to start cutting back on essentials to cover their repayments, while 13% said that mortgage and cost of living increases would make things hard financially.

"The burden of interest rate increases is falling unevenly on Australians, with a large majority expecting no change to their situation or even an improvement, while one in four are borrowers who are finding their financial situation stressed as loan repayments rise," says Canstar finance expert, Steve Mickenbecker.

"Almost half of the stressed borrowers are expecting to have to cut back on necessities in order to cover loan repayments, a situation that is going to be difficult to sustain if expenses outside of the home loan also continue to increase."

And it's little surprise that some borrowers are finding things tough. Since May the RBA has now hiked the cash rate by 225 basis points which, if passed on to what was a typical variable home loan rate of 3.00% back then, translates into hundreds of dollars in extra repayments per month.

Impact of rate hikes on monthly repayments since May

Loan size Repayment increase (+225bp)
$200,000 +$238
$400,000 +$477
$600,000 +$716
$800,000 +$954
$1,000,000 +$1193

Based on a borrower making principal and interest repayments over a 20-year loan period.

Could the RBA hit the pause button?

While the consensus among experts before today's decision was largely that the Reserve Bank would increase interest rates once again, opinions are mixed as to the course the central bank may take at its next monetary policy meeting.

Over two-thirds (69%) of the 36 economists and experts recently surveyed by Finder said that they are expecting the RBA to hold fire on interest rates for the first time in months when it meets on October 4.

"The RBA have indicated rates need to go higher before they enter 'neutral' territory. But the headwinds to activity are mounting, and we expect the Bank will pause to assess the impact of higher rates sooner rather than later," says head of macroeconomic forecasting at BIS Oxford Economics, Sean Langcake.

Any reprieve for mortgage holders will likely be short lived though, as the expectation is that the Reserve Bank will continue to lift rates before the year is out.

While varied, all four major banks are currently expecting that the cash rate will rise higher before peaking, with the Commonwealth Bank predicting a 2.60% peak, NAB a 2.85% peak and both ANZ and Westpac a 3.35% peak.

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Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He's previously worked as a journalist covering everything from property and consumer banking to financial technology. Tom has a Bachelor of Communication (Journalism) from the University of Technology, Sydney.