The stark cost of the Reserve Bank’s pre-Christmas interest rate hike

The Reserve Bank of Australia has hiked the official cash rate for the eighth consecutive month, delivering yet another hip pocket hit just before Christmas.

At its December board meeting today, the RBA lifted rates by 25 basis points to 3.1% – its highest level since December 2012.

Most economists expected today’s move on the back of the latest inflation data, with the Consumer Price Index sitting at 6.9% in the 12 months to October – down only slightly from September’s quarterly figure of 7.3%.

A man with an empty wallet at Christmas time

The pre-Christmas rate rise comes at a time when cost of living pressures are running red hot. Picture: Getty

“Inflation in Australia is too high,” RBA 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. Returning inflation to target requires a more sustainable balance between demand and supply.”

PropTrack senior economist Eleanor Creagh said there had been too small an improvement in inflationary pressures to give the RBA pause.

“It takes time for higher interest rates to fully impact household cash flows and spending intentions, particularly with so many home loan borrowers having taken advantage of record low fixed rate mortgages throughout the Covid period,” Ms Creagh said.

Reserve Bank of Australia governor Philip Lowe

RBA governor Philip Lowe warns more rate hikes are likely. Picture: Getty

How much more borrowers will pay

Mortgage Choice chief executive Anthony Waldron said the rapid increase in interest rates has required “significant adjustments” from borrowers.

“Lenders will likely reflect today’s cash rate rise in their variable rate home loan products,” Mr Waldron said.

For borrowers with $500,000 outstanding on their home loan, the December hike could add an additional $80 to their monthly mortgage repayments.

But of course, the cash rate has already risen seven times before today.

Since May, that borrower could see the combined cost of the rate hikes add up to more than $880 per month.

And for a borrower with $1 million outstanding on their home loan, the combined cost blows out to more than $1760 extra each month.

The full impact of rate rises in 2022

In these calculations, the borrower is assumed to be an owner-occupier paying principal and interest with 30 years remaining on their loan. It assumes an initial average variable interest rate of 2.86%, according to April RBA figures. It assumes each rate hike is passed on in full. The calculation does not factor in loan fees and charges, or any principal paid down over time.
Mortgage size Additional monthly repayments (combined total)
$500,000 $883
$750,000 $1324
$1,000,000 $1765

While many households are struggling with higher loan repayments, they’re yet to feel the full impact of recent rate rises.

According to CBA, there is on average a three-month lag between each rate hike and the additional cost hitting a borrower’s repayments.

So, the full impact of the past few rate hikes will flow through to household budgets over the months ahead – at a time when cost of living pressures remain red hot.

When will interest rates start to slow or go back down?

There are some signs that the RBA’s tactic is beginning to have an effect, Ms Creagh said.

“Already the headwinds of policy tightening have begun to show, with retail turnover reversing, falling for the first time this year in October with a 0.2% monthly decline.

“It’s only a matter of time before spending starts to slow more markedly.”

At an appearance at the Economics Legislation Committee in Canberra last month, Steven Kennedy, secretary to the Treasury, said inflation is expected to peak at 7.75% this month before gradually easing to 3.5% by June 2024.

“While this peak remains the same as the profile prepared for the July Ministerial statement, high inflation is expected to persist for longer than previously expected,” Dr Kennedy said.

This is based largely on higher energy prices and the impact on household bills, he added.

“Electricity and gas prices are expected to directly contribute three-quarters [of a] percentage point to inflation in 2022–23, and one percentage point in 2023–24.”

Consumer spending is set to shrink as rapidly rising rates take effect. Picture: Getty

The cash rate has surged by 300 basis points since May and that “substantial tightening” will weigh on consumption and economic growth, Ms Creagh said.

“As spending slows further and economic conditions moderate, the RBA will likely find it appropriate to pause their tightening cycle and further assess the impact, given the ‘narrow path’ that lies between taming inflation and keeping the economy on an even keel.”

Mr Lowe again foreshadowed further increases in the months ahead but insisted the RBA is not on a “pre-set course”.

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

“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.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Property markets feeling the pain

Higher interest rates, which have seen mortgage repayments soar and borrowing capacities shrink, are having a clear impact on Australia’s housing markets.

The latest data from the Australian Bureau of Statistics shows the value of home loans being approved fell in October for the ninth straight month.

Figures reveal $25.7 billion worth of mortgages were written in the month, a drop of 2.7% from September and the lowest level in two years.

“The fastest rise to the cash rate since the 1990s has quickly rebalanced the housing market from last year’s extreme growth levels, with prices falling in most parts of the country,” Ms Creagh said.

Home prices nationally are 3.81% below their March peak, the latest PropTrack Home Price Index shows, with the Sydney market hit particularly hard, recording a 6% fall.

An aerial view of a typical Sydney suburb

Home price falls have been particularly sharp in Sydney – the country’s most expensive market. Picture: Getty

“With additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, shrinking buyers’ budgets,” Ms Creagh said.

“It will take time for higher interest rates to fully affect home prices, so prices are likely to continue to fall as interest rates continue to rise.”

The mid-term outlook

But if the cash rate peaks in 2023, as the major banks expect it to, home price falls are expected to ease as uncertainty and sentiment stabilise.

On top of that, Ms Creagh pointed out that the blow from rate hikes on housing markets is being softened somewhat by “positive demand effects”.

That includes tight rental markets, strong wages growth, supply constraints, and a swift rebound in migration numbers.

And in some good news for wary households, the RBA board doesn’t meet in January, so there will at least be a one-month reprieve.

But Ms Creagh said it will be short-lived, explaining: “There is likely to be a further 25 basis point rise in the first quarter of 2023, followed by a pause as the RBA assesses the impacts of rising rates on households and economic conditions.”