RBA announces latest cash rate increase

In February's monetary policy decision, the RBA on Tuesday announced the cash rate target has increased by another 25 basis points to 3.35%. Twitter LinkedIn Email Copy Link

This means the current tightening cycle has now seen a 325 basis point increase since April last year, when the cash rate was just 0.10%.

The decision was in line with expectations from all of the big four Australian bank economists, with CPI figures for the December quarter of 2022 showing headline inflation at 7.8% for the year, a 1.9% quarterly increase.

The RBA continue to see no alternative other than to repeatedly increase interest rates, contracting demand in the economy in an attempt to ease inflationary pressures.

In his statement issued with the announcement, RBA Governer Dr Philip Lowe reaffirmed that combatting inflation remains the priority for monetary policy moving forward.

"High inflation makes life difficult for people and damages the functioning of the economy." Dr Lowe said.

"If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.

"The Board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one."

AMP Chief Economist Shane Oliver says record household debt levels mean mortgage payments are likely to reach record highs relative to household income.

"This is likely to result in a rise in mortgage stress, particularly as fixed rate loans reset this year," Mr Oliver said.

The average variable interest rate for new owner occupied home loans has already doubled since April.

The announcement also means Australia continues to be on track for a fall in national house prices of up to 10% by the end of the year, a forecast made by PropTrack based on the cash rate increasing by 50 basis points from December 2022 (3.10%).

Average national home prices are already down by 8.9% from their high in April last year, the biggest and quickest fall over nine month period recorded by CoreLogic, with data dating back to 1980.

Shane Oliver and AMP expect the eventual top to bottom fall out in home prices to reach 15-20% by the end of the September quarter.

"Rising mortgage rates remain the main driver of the slump and there is likely more to go," Mr Oliver said.

What will the cash rate peak at?

Head of Australian Economics at CBA, Gareth Aird, believes the hikes we have seen so far should begin to have their intended effect, and that further rate increases could push the economy into dangerous waters.

"An important consideration for the RBA is that fixed-rate mortgages have so far insulated many Australians from interest rate increases." Mr Aird said in advance of Tuesday's RBA announcement.

"There is a lag effect on previous rate hikes and large volumes of fixed rate mortgages expiring this year and higher monthly borrowing payments should cool demand.

"Taking the cash rate further into restrictive territory [beyond 3.35%] by the RBA could prove recessionary and counterproductive."

Economists from the big four banks all anticipated a 25 basis point increase in this month's monetary policy meeting.

Predictions for how high the cash rate will ultimately go though remain varied.

• CommBank: There will be a pause in the tightening cycle after this latest increase to 3.35%.
• ANZ: There will be at least further two 25 point hikes by May 2023, with a risk that rates could be pushed even further to 4.1% if inflation keeps rising.
• NAB: The cash rate will peak at 3.6% in March.
• Westpac: The cash rate will reach 3.85% by May 2023, but then a pause is "confidently expected".

The RBA will convene once again in March for the next cash rate target announcement. In his closing remarks for this months statement, Dr Lowe indicated further increases are likely.

"The 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." Dr Lowe said.

"RBA announces latest cash rate increase" was originally published on Savings.com.au and was republished with permission.