RBA’s focus is the inflation situation and the pink 2-3 per cent target band. Source: RBA.
Aussies are bracing for a third straight rate hike in weeks, with repayments set to jump by thousands as markets tip a May 5 move – but the RBA warns it may not be enough to tackle inflation.
Financial markets are now pricing in a 64 per cent chance of another increase at the Reserve Bank’s next meeting, which would lift the official cash rate from 4.10 per cent to 4.35 per cent.
In one of his starkest warnings yet, RBA Deputy Governor Andrew Hauser said the economy was now caught between rising inflation and weakening growth.
“We have a big income shock coming our way… it is a central banker’s nightmare: inflation up, activity down. Judging the balance between those two is, I guess, how we earn our money,” he said.
RBA deputy governor Andrew Hauser.
Market expectations of an interest rate change at the next RBA board meeting in recent days. Source: ASX
If the cash rate rises to 4.35 per cent in May, an owner-occupier with a $600,000 mortgage would see repayments rise by $91 a month, according to Canstar – taking total increases across three hikes this year – February, March and May – to $272 a month, or about $3,264 extra a year.
The pain rises sharply at higher loan sizes with an $800,000 mortgage to see a $122/month increase in May alone, or $4,356 a year, while a $1 million mortgage required a further $152/month or $5,436 a year to repay.
During a speech in New York at the Money Marketeers of New York University, Mr Hauser was asked whether a 4.35 per cent cash rate would be enough to control inflation.
“What gives you confidence that 4.35 per cent on the cash rate – which didn’t really work before – why would that be high enough this time?” a Sydney-based executive asked.
Mr Hauser’s response was blunt: “Well, we don’t know. I mean, you know, we’re feeling our way.”
He said there was still no strong confidence that the current level of rates were doing enough to bring inflation back to target.
“The rates will have to go to a level that bring inflation back to target, to be totally frank with you. And if that means them going higher, it means them going higher.”
For mortgage holders the outlook is grim as the RBA battles inflation. Source: Cameron Spencer/Getty Images.
Mr Hauser said inflation remains “too high”, with underlying inflation still sitting around 100 basis points above target, as fresh global shocks add further uncertainty.
For mortgage holders, the outlook remains grim – though one lender has broken ranks.
Virgin Money has cut one owner-occupier variable rate by 0.1 percentage points, offering a 5.59 per cent (5.61 per cent comparison rate) residential lite home loan for borrowers with at least a 20 per cent deposit.
But the broader market is moving sharply the other way, with Canstar finding five lenders increased 30 owner-occupier and investor variable rates by an average of 0.23 percentage points in the past week alone, while a further 13 lenders lifted 261 fixed rates by an average of 0.26 percentage points.
Canstar also found LCU currently has the lowest variable rate at 5.44 per cent, followed by Horizon Bank and Pacific Mortgage Group at 5.49 per cent, with Virgin Money and Police Bank sitting at 5.59 per cent.
Canstar expects thousands to be added to annual repayments bills as RB tackles inflation.
Canstar’s Sally Tindall said the era of ultra-low fixed rates was now over.
“The big banks have well and truly abandoned rates under 6 per cent,” she said.
She warned global tensions were already flowing into housing markets, with ANZ now forecasting Sydney and Melbourne prices could fall by 0.7 per cent and 1.7 per cent respectively this year.
“Buyers in Sydney, in particular, are likely to have hit their ceiling,” she said.
But Brisbane and Perth are still defying the downturn: “It’s a different story in Brisbane and Perth… a lack of stock is driving price rises in defiance of the rate hikes.”
How the cash rate target has moved since 1990. Source: RBA
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