It appears public sentiment of not wanting to reach too deep into their pockets following two years of pandemics and the previous government cashing them up with a $1.1 trillion plus loan and deficit budgets get their message through to the Reserve Bank, to back off.
And back off it did. Instead of the 0.50% increase in the cash rate that many expected the, the sixth straight hike turned up as a limp 0.25 of a percentage point.
The Reserve Bank has been hell-bent on stopping inflation in its tracks thus the unprecedented base interest rate rises in quick succession.
And we have to go back all the way to May 2022 for a rise of less than 0.50%.
The test of mettle shown by the Reserve bank to quell public spending on houses and new cars has never really bitten as yet, and this breather could be just what the public want to get back into an untamed spending spree.
In the backing off statement released by RBA governor Philip Lowe he went on to say the bank’s board decided it was time to slow down a little.
Governor Philip Lowe added, “The cash rate has been increased substantially in a short period of time, and reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”
The September 0.25% increase takes the benchmark rate to 2.6%, and even though many expected a greater rise, we are still in a position of the highest official interest rate in Australia since July 2013.
What it means for borrowers
The increase will add $74 a month to repayments on a home borrower with a 25-year term $500,000 loan, and of course double the repayment for million dollar home loan borrowers.
It’s a sobering reality that repayments on a $500,000 loan 25-year term loan have risen by $687 a month since rates started hiking in May 2022.
For any borrowers viewing the smaller than anticipated rate rise as the end of the rate hikes should take heed at the needle comment from RBA governor Philip Lowe stating, “The board expects to increase interest rates further over the period ahead. With the size and timing of future interest rate increases determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market.
The Commonwealth Bank’s head of Australian economics Gareth Aird said he expects a further 0.25% rate rise at the November board meeting.
From there it will be anyone’s guess how the RBA will assess the lagged impact of rate rises on the Australian economy, with the gun cocked for a further 0.25% rate rise at the December board meeting if high levels of spending continue. That scenario would take the cash rate to 3.10%.
There is consensus however that interest rates could peak at 3.6% by February 2023 and see repayments on a 30-year $500,000 loan increase by more than $1,000 a month in less than a year.
But the real situation is that where it all ends is not known by anyone at this moment, and whether it’s the wrong message at this time to show compassion in an economy that needs to be accepted as one where higher prices will become the norm and household spending simply needs to follow a budget, only time will tell.
The RBA will find out soon enough if inflation suddenly races beyond 10% pa.
