Hopes for a “Santa pause” on interest rates have been dashed with the Reserve Bank lifting borrowing costs for a record eighth time in as many months at its last meeting for the year.
The RBA on Tuesday raised its cash rate 25 basis points. Most economists had expected the quarter point increase to 3.1%, the highest level since the end of 2012.
“Inflation in Australia is too high, at 6.9% over the year to October,” governor Philip Lowe said in a statement.
“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,” Lowe said. “Returning inflation to target requires a more sustainable balance between demand and supply.”
Australia’s headline inflation rate is expected to peak at 8% by the current quarter and is already running at levels not seen since 1990. The RBA’s preferred gauge of price increases, known as the trimmed mean, was at 6.1% in the July-September period, or well outside the central bank’s 2%-3% target range for underlying inflation over time.
Excessive government spending during the pandemic combined with soaring energy prices in the wake of Russia’s invasion of Ukraine have caused inflation to spike in many nations.
Lowe indicated that the RBA’s cash rate will rise further – depending on the state of the global economy, household spending and what happens to wages and prices.
“The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” he said in the statement.
“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,” he said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Treasurer Jim Chalmers said the full impact of the rates rises were “obviously still to be felt”.
“The magnitude of that impact and the timing of that impact is still in many ways uncertain,” Chalmers said, adding that “harsh weather events and natural disasters have the capacity to have a substantial impact on our economy and on our budget”.
Among banks shifting their view was the CBA, Australia’s biggest issuer of mortgages, which now expects the RBA’s cash rate to peak at 3.35%, or a quarter point higher than before today. The CBA had anticipated softer language about future moves but still forecasts a half-point cut by the RBA by the end of 2023.
David Plank, head of Australian economics at ANZ, said his bank still expects three more rate rises to come, with a top rate of 3.85% by May.
“We think inflation and wages growth will prove to be too high for the RBA to stop hiking anytime soon,” Plank said. “We expect a 25bp increase in February, after the [December quarter] CPI and with the extension of the RBA’s forecasts out to mid-2025 still expected to show inflation at 3% or higher.”
“Wage data in mid-February should then make the case for another 25bp in March,” he said, adding that a pause was possible in April before a final quarter-point increase in May.
Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics, predicted the RBA has another half point of rises to come before the cash rate reaches 3.6%.
“Higher interest rates appear to be cooling the economy, and this headwind will only strengthen in the coming months,” Langcake said. “The challenge for the board is to maintain some momentum in the economy while taking the heat out of demand-driven inflation pressures.”
A detailed state of the economy will be on show on Wednesday when the Australian Bureau of Statistics releases GDP figures for the September quarter. Given the low base from a year ago as half the economy was coming out of lockdown, the annual rate may come in at about 6% – a high point before it declines rapidly.
Monetary policy has not been tightened this fast in Australia since the second half of 1994 when the RBA lifted its cash rate 275bp over five meetings.
Sign up for Guardian Australia’s free morning and afternoon email newsletters for your daily news roundup
Each quarter point increase adds about $75 in monthly repayments for each $500,000 borrowed, RateCity said. The 300 basis point rise since May would swell monthly repayments by $834 for such a mortgage.
Few sectors of the economy are as sensitive to interest rates as the property market, and the effect of rises leading up to last month were already evident, Eliza Owen, CoreLogic Australia’s head of research, said
“From May through to October of this year, the monthly value of secured finance declined 17.9%,” Owen said. “Annual sales volumes have trended 13.3% lower compared to this time last year.”
From a low of 2.41% annual interest for new variable home loans in April, borrowers can expect to pay 5.08%, assuming the November and December RBA rate rises are fully passed on, she said.
The “sticker shock” will be even more marked as those on fixed-rate loans have to refinance. Average terms for three years will jump from 1.95% to more than 5%, Owen said.
Companies, too, are exposed to higher borrowing costs.
“Christmas is not coming early for businesses this year,” said Gavan Ord, a senior manager at CPA Australia. “The interest rate rise is no surprise but it will add pressure on business and household budgets at a critical time of the year.”
Among 1200 people surveyed by CPA this month, more than a fifth named rising interest rates as their number one concern for the new year.
Even those without loans could be exposed to higher costs, with renters warned they can expect their bills to rise too.
“Soaring interest rates have a butterfly effect, as many landlords pass on the increases to renters,” said Mark Degotardi, CEO of the Community Housing Industry Association in NSW. “And with record-low vacancy rates, many families have no choice but to pay the higher rent and live in housing stress, or face homelessness.”
The RBA board will take a break during January, with its next rates meeting scheduled for 7 February.
More to come