Fourth straight RBA hike pushes cash rate to six-year high

The official cash rate has hit the highest point it's been since April 2016 following the Reserve Bank of Australia's (RBA) decision to increase rates by 50 basis points to 1.85% at its August board meeting this afternoon.

Today's move means that the RBA has now hiked rates for four consecutive months, during which time the cash rate has shot up by 175 basis points.

In his post-meeting statement, governor Philip Lowe reiterated that the central bank would do what is necessary to bring inflation - which recently hit 6.1% and is expected to rise further before the end of the year - back down to the target range of 2-3%.

"The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy."

"The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market."

Refinancing levels soar as repayments begin to bite

If the Reserve Bank's aim is to curb consumer spending and dampen demand by ensuring that homeowners are making higher debt repayments, then the latter is certainly working.

Since May, the average variable home loan rate in financial comparison website Mozo's database has jumped by 104 basis points from 3.02% to 4.06%, and it will almost certainly shoot up again once lenders pass on today's rate hike.

Unfortunately, as the table below shows, the impact of these rate hikes on Australians with a mortgage is likely to have been significant, with monthly repayments rising by hundreds of dollars.

"Although home loan interest rates are returning to more normal levels following the pandemic, consecutive increases are clearly hitting home, with many borrowers confronted with higher monthly repayments," says Mozo personal finance expert, Claire Frawley.

One bright spot is that mortgage holders don't appear to be settling for whatever interest rates are being dished up by their existing banks or lenders.

That's because Australians refinanced a record $18.1 billion worth of home loans from one lender to another during June, figures released this morning by the Australian Bureau of Statistics show.

Of course, not everyone is able to switch loans or lenders, but for those who can, the savings can be substantial. For instance, borrowers could save $4,068 over the course of a year by refinancing from the average variable rate in Mozo's database (4.06%) to the lowest rate currently available (2.79%).

"Now is the time to act when it comes to your mortgage," says Frawley. "By getting on the front foot and refinancing to a lower interest rate, you can help soften the burden of rising interest rates to your household budget."

Property prices dampened by rate rises

Rapidly rising mortgage rates are also having an impact on the property market. National home values have now fallen for three consecutive months according to CoreLogic's latest figures, including a 1.3% drop in July.

Sydney (down 2.2%) and Melbourne (down 1.5%) continue to lead the way in terms of property price drops in the capital cities, but they've now been joined by Hobart (down 1.5%), Canberra (down 1.1%) and Brisbane (down 0.8%) which also recorded month-on-month declines during July.

CoreLogic's research director, Tim Lawless, says the current rate of decline is the fastest recorded by the firm since the start of the Global Financial Crisis in 2008, and conditions are likely to get worse if interest rates continue to rise in the months ahead.

"The rate of growth in housing values was slowing well before interest rates started to rise, however, it's abundantly clear markets have weakened quite sharply since the first rate rise on May 5.

"Due to record high levels of debt, indebted households are more sensitive to higher interest rates, as well as the additional downside impact from very high inflation on balance sheets and sentiment."

Where to next for interest rates?

With the Reserve Bank's August interest rate decision now done and dusted, attention will begin to turn towards the central bank's next monthly board meeting on September 6.

The good news for homeowners is that they may be in for a brief respite, as 65% of economists and experts polled as part of Finder's latest RBA Cash Rate Survey share the opinion that the Reserve Bank will stay its hand next month after four consecutive rate rises.

With inflation likely to continue to grow though, experts are still anticipating more interest rate rises from the RBA in the near future, with 83% of those surveyed by Finder agreeing that the cash rate will peak at 2.50% or higher.

"The RBA are now very focused on returning quickly to a 'neutral' official cash rate and have estimated that neutral is around 2.5% to 3%", says David Robertson, head of economic and markets research at Bendigo Bank.

Depending on further inflation and jobs data, the cash rate should approach this level steadily by year-end."

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