In a move that was widely expected, the nation’s central bank hiked interest rates for the tenth straight occasion on the first Tuesday of the month.
The Reserve Bank of Australia opted to lift the official cash rate by another 25 basis points, which brought the benchmark rate to a total of 3.60%.
That rate is the highest in 11 years, or since mid-2012, and it follows 350 basis points worth of increases. As such, the RBA has delivered the fastest monetary tightening campaign in Australia’s history, with the very real prospect that it may have some way to go.
Although the most-recent monthly inflation data for January showed lower growth in consumer prices at 7.4% - prompting both the RBA and Treasurer to call the peak on inflation - the latest rate hike was deemed necessary given inflation is still significantly higher than the target range.
Nonetheless, political pressure continues to mount on the central bank, as well as the major banks passing on said rate hikes to borrowers.
Where to next for interest rates?
Following the RBA’s hawkish pivot at the conclusion of its February Board meeting, all eyes were focused on the statement released in tandem with the March decision.
In some respects, the central bank has walked back some of the language it used calling for multiple rate hikes.
Instead, the Board indicated that it expects further tightening of monetary policy to ensure inflation returns to target. What’s more, the bank also indicated elevated inflation is a temporary challenge.
The RBA’s softer language also extended to the fact that it made clear reference to considering the impact of cumulative interest rate hikes to date, and that a wages-price spiral does not appear to be eventuating, and if anything, is deemed low risk at this time.
By tweaking the wording to remove further “increases” to further “tightening”, there is some belief that maybe just one more rate hike might be coming, and a pause could be on the cards after that if fresh economic data warrants it.
Among the potential catalysts for such a change include the latest inflation readings, jobs data, and sluggish GDP growth.
Financial markets dialled back their consensus views for the rate outlook in the immediate aftermath of the RBA decision. Nonetheless, the expected cash rate peak is still at 4.0%, down from 4.1%, suggesting at least one, and potentially two more rate hikes are predicted.
If the central bank does opt to pause its rate hike campaigns, the move would not preclude that campaign from resuming in the second half of the year if inflation remains stubbornly high.
Increasing home loan repayments
Following the tenth consecutive RBA rate hike, borrowers have been dealt another setback as far as loan repayments, especially with the major banks passing on higher rates almost straight away.
Borrowers making principal and interest repayments against an ‘average’ variable rate home loan on a 25-year timeframe now face an increase in monthly repayments similar to the below:
● $500,000 mortgage: $1,084 more since the start of the rate hike cycle
● $750,000 mortgage: $1,626 more since the start of the rate hike cycle
● $1,000,000 mortgage: $2,168 more since the start of the rate hike cycle
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