Base rate rises reach eight in a row as a further 25 basis points are added

Perhaps feelings some Christmas spirit, The Reserve Bank of Australia (RBA) has decided to only lift base rate interest by 0.25%, taking the base cash rate to 3.1%.

The December meeting of the RBA cements this result as the bank’s eighth straight rate rise since it started lifting the cash rate from a record low of 0.1% in early May 2022.

The base cash rate now sits at its highest level in a decade, you have to go back ten years to November 2012, when it was higher, at 3.25%.

For those on a 25-year term mortgage of $500,000, this increase will add an addition $75 to their monthly repayments

The banks appear unwilling to share this cost against its own profit margins as both CBA and NAB announced quickly they intended to increase their variable mortgage rates, by 0.25% before Christmas from the 16 December, while Westpac ups its rate on 20 December 2022.

While only speculative at this stage, the RBA will let themselves and borrowers enjoy their holiday break with no increase in January, but then whack a 0.25% or 0.50% increase onto the official base rate in early February 2023.

If that happens, the base cash rate will hit 3.35% or 3.60%, and if banks levied the full increase, it would see borrowers on a 25-year term mortgage cracking through the 6.0% interest mark.

Behind the RBA Decision

This is what Reserve Bank Governor Philip Lowe had to say about the December 2022 base rate increase.

At its meeting today, the RBA Board decided to increase the cash rate target by 25 basis points to 3.10 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.00 per cent.

Inflation in Australia is too high, at 6.9 per cent over the year to October 2022. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.

A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December 2022 quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.

The Australian economy is continuing to grow solidly. Economic growth is expected to moderate over the year ahead as the global economy slows, the bounce-back in spending on services runs its course, and growth in household consumption slows due to tighter financial conditions. The Bank’s central forecast is for growth of around 1½ per cent in 2023 and 2024.

The labour market remains very tight, with many firms having difficulty hiring workers. The unemployment rate declined to 3.4 per cent in October, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, although they have declined a little recently.

Employment growth has also slowed as spare capacity in the labour market is absorbed. Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

There has been a substantial cumulative increase in interest rates since May. This has been necessary to ensure that the current period of high inflation is only temporary. High inflation damages our economy and makes life more difficult for people. The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time.

The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments. Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain.

Another source of uncertainty is the outlook for the global economy, which has deteriorated. The Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.

The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.

The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

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