The Reserve Bank of Australia has decided to increase the cash rate target by 25 basis points to 2.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.50 per cent.
The cash rate has increased substantially in a short period of time of 6 months. Reflecting on this, the RBA 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.
RBA governor says, “We are committed to returning inflation to the 2–3 per cent range over time.”
“Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead.”
A further increase in inflation is expected over the months ahead before inflation then declines back towards the 2–3 per cent range.
The Bank’s central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.
Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining after the earlier large increases.
How much extra will your mortgage be each month?
Melbourne-based finance solutions specialist Mark Unwin explains.
“Unless you’re on a fixed-rate mortgage, the banks will likely follow the RBA’s lead and increase the interest rate on your variable home loan soon.
Let’s say you’re an owner-occupier with a 25-year loan of $500,000 paying principal and interest.
This month’s 25 basis point increase means your monthly repayments could increase by almost $75 a month. That’s an extra $685 on your mortgage compared to May 1.
If you have a $750,000 loan, repayments will likely increase by about $110 a month, up $1030 from May 1.
Meanwhile, a $1 million loan will increase almost $150 a month, up $1,380 from May 1.”
When exactly will this latest rate rise kick in?
Mr Unwin says, “Once the RBA hikes the official cash rate, your bank will usually announce its own interest rate hike (and have its own notice period) for variable rates in the days to come.
“Let’s also assume you receive a notice from your lender this Friday (October 7) of their own subsequent rate increase, with a 30-day notice period.
By the time October 20 arrives, you won’t be paying higher repayments, as the full 30 days notice would not have passed.
When that 30 days notice finishes on November 6, the daily interest rate you’re charged would increase to the new amount.
That means when your monthly repayment on November 20 rolls around, you’d be charged at the new, higher rate (but calculated only from November 6).
By the time December 20 arrives, the monthly repayment amount you’re charged would fully reflect the new rate.”
The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring workers. The unemployment rate in August was 3.5 per cent, around the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. Beyond that, some increase in the unemployment rate is expected as economic growth slows.
Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher. Given the tight labour market and the upstream price pressures, 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.
Price stability is a prerequisite for a strong economy and a sustained period of full employment. Given this, the Board’s priority is to return inflation to the 2–3 per cent range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and it is clouded in uncertainty.
RBA claims that today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. The Board expects to increase interest rates further over the period ahead. 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.