The RBA has delivered its last gift to Australians for the year, increasing the cash rate by 25 basis points in December to 3.10%.
The 25 basis point hike marks 300 basis points’ worth of tightening to the cash rate since May.
- RBA hikes the cash rate by 25 basis points in December to 3.10%.
- Consecutive cash rate increases have rebalanced the housing market - prices are sitting 3.81% below their March peak.
- The cash rate is expected to peak between 3.10% and 3.85% by mid-2023.
This comes despite weaker than expected monthly inflation, coming in at 6.9% down from the September quarter print of 7.3%.
For homeowners with an average sized mortgage, a 30-year 3.00% p.a. interest rate increasing to 6.00% p.a. over the past eight months means paying an extra $1,059 in monthly interest costs.
Economists from all four big banks correctly predicted the Board would raise the cash rate by 25 basis points.
CommBank Head of Australian Economics Gareth Aird said the RBA is still flying blind to a degree, given it takes roughly three months for those on variable rates to feel the increase.
“The notion of pausing in the tightening cycle has now appeared in every piece of RBA communication since the Governor’s remarks at the Reserve Bank Board Dinner on 1 November,” Mr Aird said.
“We expect that at the December board meeting the discussion will be between raising the cash rate by 25 basis points or leaving policy on hold.”
PRD Chief Economist Dr Diaswati Mardiasmo argued a 25 basis point hike is a ‘keep the ship steady’ approach over the holiday period.
“Our inflation rates have declined slightly, which suggests that the tight cash rate measures are starting to take effect,” Dr Mardiasmo told Savings.com.au.
“That said, it is still high and we do still want to pull it down even further.
“A 25 basis point increase is the middle ground approach to make everything happen – still on the trajectory to pull down inflation whilst paying close attention to household budgets and people’s sentiment.”
PropTrack Senior Economist Eleanor Creagh said the consecutive cash rate increases have quickly rebalanced the housing market following last year’s extreme growth.
“Prices nationally are now sitting 3.81% below their March peak after falling for the eighth month in a row amid headwinds from monetary tightening,” Ms Creagh explained.
“With additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, shrinking buyers’ budgets.
“It will take time for higher interest rates to fully affect home prices, so prices are likely to continue to fall as interest rates continue to rise.”
The RBA will next meet in early February following the summer holidays.
When do the big-four banks think the cash rate will peak?
While all four big bank economic teams expected a 25 basis point hike this month, the peak of the cash rate still remains a contentious issue.
Here are the predictions (before the latest hike):
- CommBank: 3.10% by December 2022, dropping to 2.60% by December 2023
- ANZ: 3.85% by May 2023, dropping to 2.85% by November 2024
- NAB: 3.60% by March 2023, remaining steady into 2024
- Westpac: 3.85% by May 2023, dropping to 2.85% by November 2024
The cash rate started at 0.10% in April 2022. Considering big four bank forecasts, interest rates on home loans could rise between 300 and 375 basis points by mid 2023.
"RBA dampens Christmas cheer with a 25 basis point increase in December" was originally published on Savings.com.au and was republished with permission.