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Rate hike

cash rate rise

The Reserve Bank has increased interest rates for the first time in over 11 years, with a 25-basis-point rate hike taking the cash rate target to 0.35 per cent.

Rate hike reasoning

The move surprised financial traders, who had priced in around a two-thirds probability of the RBA raising rates this month.

The combination of recently high inflation numbers and evidence that workers were starting to get more significant wage increases meant the time was suitable for “normalising” interest rates.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he noted in his post-meeting statement.

Bank’s rate hike reaction

The four big banks will pass on the total value of the Reserve Bank’s increase in interest rates to mortgage customers as the phase of ultra-cheap home loans comes to an end.

CBA was the first bank to react to the RBA’s historic rise of the cash rate from 0.1% to 0.35%, while ANZ and Westpac followed shortly after. NAB announced it rise the following day.

As investors waged those banks will benefit from rising rates, CBA stated interest rates for both investors and owner-occupiers would increase by 0.25 percentage points, and the changes would likely take effect from May 20. ANZ is raising variable home loan rates by the same amount, however, its changes take effect earlier, on May 13. Westpac is also increasing by 0.25 percentage points, and its changes take effect from May 17. NAB announced raising its variable home loan rates by 0.25 percentage points, effective as of May 13.

Rate rises will be new to some borrowers and one option to consider is fixed-rate loans.

CBA’s standard variable rate for owner-occupiers paying principal and interest will rise to 4.8% due to the changes.

Westpac’s chief executive of consumer and business banking said they would also raise some of its deposit interest rates by 0.25 percentage points. However, CBA and ANZ did not proffer any changes to deposit rates.

ANZ group executive for Australian retail Maile Carnegie pointed out that many borrowers are ahead of their minimum repayments, alongside the extremely high level of household deposits amassed in recent years.

Interest rate comparison firm RateCity said a 0.25 percentage point increase would increase repayments on a $500,000 loan by approximately $65 a month, or $130 a month for a $1 million mortgage.

Future rate hikes

Markets are pricing in the certainty of another rise in June, with predictions between another 25-basis-point hike and an even more significant increase.  The market’s betting centres on a 0.7% cash rate after the RBA’s June 7 meeting, twice the current level of 0.35%.

Economists at the central banks remain deeply divided about how high-interest rates would rise from a 1.6 per cent forecast at the CBA up to more than 3% tipped by ANZ.

Westpac was in the middle, tipping a 2 per cent cash rate sometime next year.

RateCity estimates that would add $512 a month to a $500,000 mortgage and double that — $1,025 a month — to a million-dollar loan.

Lowe said the RBA expected inflation to hit 6 per cent this year and more interest rate rises to come. “The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” said Lowe.

Over the longer term, Lowe stated it was “not unreasonable” to expect the cash rate would increase to 2.5%, which he described as a more normal level for borrowing costs.

What does a cash rate hike mean?

In simple terms, raising interest rates makes borrowing money more expensive.

Meaning that for people with a mortgage, their repayments are higher.

Although, it can also lead to more returns on savings and superannuation, both of which accrue interest on growth.

The RBA wields interest rates to manage the rates of inflation.

When borrowing becomes too expensive, the demand for goods and services can decrease, bringing the overall cost down.

Cost of living

Rises in the cost of petrol, electricity and food have seen many Australian households struggling to make ends meet.

The ABS has released cost of living indices for the March quarter, which soared from rising petrol prices. As a result, all cohorts’ cost of living in March 2022 rose by more than the underlying inflation rate of 3.7%, although each also grew by less than headline inflation (5.1%).

The March quarter’s 5.1% annual consumer price index (CPI) reading easily topped the market expectation of a 4.6% pace. The so-called trimmed mean inflation, which strips out volatile changes and is used by the central bank to set rates, rose 3.7%, or the most since March 2009.

As anticipated, fuel, food and material costs were among the items posting significant increases in the first quarter of 2022. Energy prices had already been higher before Russia invaded Ukraine in February. Still, the war added impetus, with fuel up 11% in the quarter alone – the most since Iraq invaded Kuwait in 1990.

Food prices rose 2.8%, with vegetables alone up 6.6%, fruit up 4.9%, and beef up 7.6% in the March quarter. According to Rabobank, the pace of food price increases, including 4.3% year-on-year, is the most since 2011.

Only clothing and footwear among the ABS categories fell for the quarter compared with a year earlier.

Homeowners

Labor has seized on the Reserve Bank’s decision to hike interest rates higher than many had predicted, calling it a “tough day” for millions of Australians now facing an increase in their monthly mortgage payments.

But the Prime Minister argued homeowners have been preparing for a potential interest rate rise and said it resulted from a strong economy.

Australians face a cost-of-living crisis if the banks pass on the total increase, saying households have already been hit with “skyrocketing inflation, rising interest rates, falling consumer confidence and falling real wages”.

“Scott Morrison’s economic credibility was already tattered, and now it’s completely shredded,” Mr Chalmers said.

But Scott Morrison said the Reserve Bank’s decision to increase the cash rate was proof of a resilient economy. Australia was faring better than most other countries facing rapid inflation.

Vogue Advisory Group – helping you manage your finances

If you would like any financial advice regarding managing your finances following the cash rate rise, don’t hesitate to contact us, and one of our advisors will assist you.

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