The Reserve Bank of Australia has delivered the fourth double interest rate rise in a row, but there are signs it may now slow down the pace of its hikes.
The RBA board on Tuesday lifted the cash rate by 50 basis points to 2.35% – the highest level since January 2015.
RBA governor Philip Lowe said the further increase in interest rates will help bring inflation back to the central bank’s target level, although more hikes will be necessary.
“The board expects to increase interest rates further over the months ahead, but it is not on a pre-set path,” he said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”
Mr Lowe said the board is committed to returning inflation, which is at its highest level since the early 1990s and is expected to increase further, to its 2-3% 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 clouded in uncertainty, not least because of global developments.”
Mr Lowe noted an important source of uncertainty remains the behaviour of household spending.
“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 in most markets after the earlier large increases.”
He added that people are finding jobs and receiving higher wages, while many households have built up large financial buffers and the saving rate remains higher than before the pandemic.
PropTrack senior economist Eleanor Creagh said the RBA board remains committed to overcoming the challenge of high inflation.
“To ensure inflation expectations remain anchored around its 2% to 3% target, the RBA has continued to frontload its hiking cycle,” Ms Creagh said.
Tuesday’s move marks the first time the RBA has raised rates for five months in a row, as well as being an unprecedented fourth consecutive double rate hike.
The RBA has now lifted rates by 225 basis points since May. Comparison website Finder estimated the combined hikes will cost the average borrower, with an average home loan of $611,000, an additional $801 per month on what they were paying in April.
Ms Creagh said the fastest rise in the cash rate since 1994 has led to home prices falling across Australia, with prices nationally now sitting 2.7% below their March peak.
“Today’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down,” she said.
Despite the widespread declines forecast for well into 2023, housing prices will still be higher than pre-pandemic levels.
More rate rises coming – but supersized hikes may be over
Economists at three of Australia’s four largest banks expect the RBA will now slow down the pace of rate hikes and go back to smaller “business as usual” moves of 25 basis points.
Commonwealth Bank of Australia economists believes Tuesday’s move will be the RBA’s last double hike. They expect there will be one further increase of 25 basis points in November that takes the cash rate to 2.6%, adding there is a risk of it peaking at 2.85%.
“We think that provided the RBA pauses for at least a few months in their tightening cycle when the cash rate is 2.6% or 2.85%, the data will indicate that there is no need to continue to take the policy rate higher,” CBA’s head of Australian economics Gareth Aird said.
“Indeed, taking the cash rate higher would likely generate a hard landing in the economy.”
ANZ economists, however, believe the RBA has more supersized hikes coming in October and November to take the cash rate to 3.35%. But they haven’t ruled out the possibility of a double hike next month before smaller 25 basis point moves in November and December.
ANZ’s head of Australian economics David Plank said Mr Lowe may use a speech on Thursday to signal that the RBA may step down the size of hikes.
“Regardless of what Mr Lowe says, it will be the data that matters,” Mr Plank said. “Given our expectations, we think a 50 basis point rate hike in October is more likely than 25 basis points.”
Westpac chief economist Bill Evans expects the RBA board will move to 25 basis point rises from its October meeting.
“The second stage of the tightening process, with consecutive 25 basis point increments, is expected to extend out to February next year with the rate peaking at 3.35%,” he said.
National Australia Bank economists expect 25 basis point rises in October and November that take the cash rate to a peak of 2.85% before the RBA pauses to assess the impact of its rapid hikes.
Ms Creagh expects the RBA will slow the pace of tightening at some point, although when remains unclear.
“Given the lagged effect of rate rises, a large share of variable rate borrowers ahead on repayments and borrowers on fixed terms yet to expire, many mortgage holders are yet to see their minimum repayments increase,” she said.
“As this changes and households are forced to make budgetary adjustments, discretionary spending will likely slow.
“This means the RBA is fast approaching a point where erring on the side of caution may be appropriate, however, this is offset by the unenviable task of taming inflation pressures and keeping inflation expectations anchored.”
She added the RBA is well aware of that predicament, having noted the challenge of keeping the economy on an “even keel” while returning inflation to its 2-3% target range.
The US Federal Reserve’s actions are expected to influence the RBA after Fed chair Jerome Powell recently said rate hikes will continue “until the job is done”, but also noted that “at some point” in the tightening cycle it will be appropriate to slow the pace of increases.
Source: realestate.com.au
