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RBA Interest Rates: The Reserve Bank Increased the Official Rate to 3.35% to Combat Inflation


Mortgage holders are expected to experience immediate hardship, but the RBA predicts more hikes in an effort to manage inflation.

As it works to reduce inflation, Australia’s central bank has hit borrowers with yet another raise in interest rates, bringing the record streak of increases to nine straight meetings. It also says there will be “additional increases” in the future.

The Reserve Bank increased the cash rate by 25 basis points to 3.35% during its first meeting yesterday of 2023, the highest level in little over ten years. The majority of economists had expected such a rise.

In a statement that was included, RBA governor Philip Lowe said that “global inflation remains quite high.”

But as energy costs decline, supply-chain issues are resolved, and monetary policy is tightened, it is slowing, according to Lowe. However, it will take some time until inflation returns to the desired range of 2%-3%.

According to Lowe, “the Board anticipates that any additional interest rate hikes will be required over the coming months to ensure that inflation returns to goal and that the current period of high inflation is only momentary” as a sign that the RBA anticipates the cash rate starting to rise by at least or over half basis point.

After an increase in inflation, the RBA started raising interest rates from a historical low of 0.1% before the federal election in May of last year. The hike damaged the Morrison government’s chances of winning re-election, but further increases at each RBA board meeting have made it difficult for Jim Chalmers, the new treasurer, to justify why debt repayment expenses were increasing yet again on a monthly basis.

With even three full percentage points of rate increases by the RBA by that point, Australia’s consumer prices inflation was rising at an annualized rate of 7.8% in the December quarter, the greatest in more than 32 years.

If the RBA were to raise its cash rate by yet another 50bp to 3.85%, the average mortgage payment per month for a $500,000 loan might increase to $1,058 from where they were before May 2022, as per RateCity.

Prior to today’s decision, the two biggest banks, ANZ and Westpac, both predicted that the peak interest rate would be 3.85%.

Additionally, financial markets have factored in a higher RBA rate peak before a drop. Following the rating announcement, the benchmark stock index dropped by approximately 0.5% while the Australian dollar increased by nearly a quarter of a US cent to approach 69.5 US cents.

Prior to the RBA’s quarterly monetary policy statement being released on Friday, Lowe said that it will take some time for the consumer price index to stabilise at the bank’s target range.

While Lowe stated that CPI will decrease to “approximately 3% by mid-2025,” emphasising the protracted glide path ahead, the prediction of a fall to 4.75% this year remains intact from the RBA’s prior statement given in November.

“It is crucial that this remain the case, he continued.” Medium-term inflationary pressures remain firmly anchored.

Cherelle Murphy, the chief economist at EY, stated that the RBA “remain uneasy with the inflation forecast.”

“The RBA is determined to prevent a prices-wages spiral, which would make their work more challenging in the next year,” Murphy said, adding that the ABS’s release of the December quarter wage price index on February 22 will be “keenly” examined.

The “mortgage cliff,” when certain households transition from very low fixed mortgage prices to variable rates, poses a significant risk, she added. This will cause large drops in household disposable income.

The largest bank in Australia, Commonwealth Bank (CBA), revised its prior prediction that the RBA’s cash rate will peak at 3.35%. It now anticipates hikes of 25 basis points in both March and April, resulting in a peak rate of 3.85%.

Gareth Aird, head of Australian economics at CBA, stated that “two further 25bp interest rate rises implies the chance of a gentle landing for the economy is diminished dramatically.” Many home loan debtors will experience significant financial difficulty in the upcoming year.

ANZ is maintaining its prior prediction of a 3.85% peak cash rate, which now appears to be more accurate.

According to Tim Lawless, head of research at CoreLogic, some 800,000 mortgage holders are expected to switch from constant to variable rates of up to 6% or more in 2023.

According to Lowe, GDP growth this and the next year will be roughly 1.5%, which is a decrease from the RBA’s November edition of its quarterly monetary policy report, which predicted 2% GDP growth for 2023.

However, the RBA does not anticipate a significant rise in the unemployment rate. The rate was lingering around the half-century lows of 3.5% in December, and the central bank now anticipates it to gradually increase to 3.75% by year’s end and further climb to 4.5% by mid-2025.

The unemployment rate was above 5% and increased the last time the cash rate was at roughly 3.35% in late 2012.

Image source : https://unicornfinancial.com.au/rba-increased-cash-rate-again-to-3-35






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