Interest rate rise number six shows Reserve Bank is starting to get nervous
The Reserve Bank has lifted interest rates for the sixth consecutive month but it now faced accusations that it had dropped its aggressive attack on inflation by limiting the increase in the official cash rate to 25 basis points (or 0.25 per cent).
Four of the five previous hikes have been at 50 basis points but there has been concern that the RBA was moving too quickly and the hikes were steering the Australian economy towards the rocks.
The latest hike means repayments on a $750,000 loan have increased by about $1000 a month since April and the NAB was the first bank off the mark to increase its variable loans by the full .25 per cent. But the real estate industry said the latest move just returned mortgages to their pre-Covid levels.
The decision to limit the increase to 25 basis points set share trading alight with the ASX jumping more than 70 points after the announcement while the Australian dollar fell a cent to the US64.5 cent range.
The RBA said more rate increases were likely but economists said the decision to lift by only .25 per cent meant the “front-loading” was done. But it was also likely that the slower pace of rate hikes would extend into 2023.
The RBA said the lower increase was designed to allow it to assess the pace of household spending, wages, inflation and other global economic developments.
According to ANZ economist Adelaide Timbrell the latest hike, which moved the official cash rate to 2.6 per cent, was a “bit dovish considering the labour market and monthly inflation figures are still so strong.
“It will likely take a lot to shift back to 50 basis point (increases), since this is a strong signal that they’re moving from “get to neutral ASAP” to refinement mode.”
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IFM economist Alex Joiner said the RBA was the first among the central banks “to switch to a more dovish tack”.
AMP Capital’s Shane Oliver said the move was sensible given that the previous increases take time to have an effect.
“That said it remains hawkish and is still flagging more hikes ahead. We expect the peak at 2.85 per cent, but risk to 3.1 per cent,” he said.
The previous rate hikes have done little to impact the job market so far, but they had cut a swathe through the housing market.
CoreLogic said if the hike was passed on in full, mortgage rates would lift to 4.76 per cent.
“For a new principal and interest loan of $750,000, this would take monthly mortgage repayments from $2925 a month in April to $3917,” CoreLogic said.
“This scenario makes clear the impact of rising rates on buyer demand, with further mortgage rate rises through October likely to place additional downward pressure on the housing market.
“Recently released data from the RBA shows housing debt to annualised disposable income shot up to a record 144.1% as of June 2022, reinforcing the significance of rate rises on household balance sheets.
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Australia’s August housing finance commitments fell another 3.4 per cent month-on-month with investor lending down 4.8 per cent, owner occupiers (excluding first home buyers) down 5.3 per cent.
However, building approvals have become very volatile. The total number of dwellings approved rose 28.1 per cent in seasonally adjusted terms in August, following a 18.2 per cent decrease in July.
Core Logic also found house prices continued falling in September. In Brisbane, they dropped another 1.7 per cent, which was marginally less than the 1.8 per cent fall in August.
The ASX jumped another 50 points after the announcement.
In the RBA statement, Governor Philip Lowe said the outlook for the global economy was a source of concern.
“Another is how household spending in Australia responds to the tighter financial conditions. 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,” Lowe said.
“Consumer confidence has also fallen and housing prices are declining after the earlier large increases. Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages. Many households have also built up large financial buffers and the saving rate still remains higher than it was before the pandemic.
“Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down.
“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.”
