The RBA knows that any decision whether to raise or pause interest rates is tricky because you don’t want rate hikes to tip the economy over the edge into recession.
This week they took a gamble by lifting rates another 0.25 per cent to 3.85 per cent. The Board has now delivered an incredible 375bp of rate rises over just 12 months, which is an extraordinary amount of tightening.
In the lead up to the decision a Bloomberg survey showed 21 analysts expected no change to the cash rate in May and only nine forecasted a rate hike.
And it may not be the end of the increases as the RBA Governor retained a tightening bias. But it has to be said, the statement attached to the decision saw a watering down of the language of another rise.
Current 3.85 per cent may be the peak
In the Governor’s Statement accompanying the April Board meeting when the central bank paused, it was noted that, “the Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target”.
This week that line was modified to, “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve”.
If – and it’s a big if – the inflation and jobs data stay in line or are weaker than the RBA’s forecasts, many analysts see the current 3.85 per cent as the peak in the cash rate. So, it will all be in the data.
Fixed rate cliff is looming
Don’t forget there is still natural tightening to come down the big pipeline of fixed rate home loan rollovers in 2023 and 2024. The massive change from ultra low fixed rate home loans to significantly higher variable and new fixed loans will drain the cash flow of many home borrowers and spending decisions will be hit hard.
The RBA has kept their forecast profile for the unemployment rate unchanged, expecting it to increase gradually to hit around 4.5 per cent in mid 2025.
The RBA forecasts GDP economic growth to be 1.25 per cent this year and around 2 per cent over the year to mid 2025.
What this means for the average mortgage holder
With the big banks already passing on this week’s rate rise, the average owner-occupier with a $500,000 loan and 25 years remaining will see their monthly repayments rise by another $78.
As this is now the 11th rate hike since last May, someone with a $500,000 debt at the start of the hikes has seen their repayments increase by a total $1,058 a month.
Expected increase in mortgage repayments
Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.
The key now is to know what rate you’re paying after this latest round of hikes. So, according to RateCity.com.au these are your benchmarks:
- The average existing owner-occupier variable rate will be 6.61 per cent (for those who haven’t negotiated since the start of the hikes).
- A competitive variable rate will be under 5.5 per cent for owner-occupiers paying principal and interest.
- A handful of lenders are likely to still offer rates under 5.25 per cent.
If someone with a $500,000 debt today and 25 years remaining on their loan refinanced from the average variable rate to one of the lowest in the market, RateCity estimates they could save up to $12,382 in the next two years.
This includes the costs of refinancing and assumes the cash rate moves in line with CBA’s forecast.
Someone with a $1 million loan refinancing from the average rate to one of the lowest could save an estimated $25,914 in the next two years.
Potential savings by refinancing
Based on an owner-occupier switching from the average rate of 6.61 per cent to a rate under 5.25 per cent. Includes switching fees.
Source: RateCity.com.au. Notes: based on an owner occupier paying principal and interest with 25 years remaining on their loan. Includes switching costs and assumes the cash rate continues to move in line with CBA’s forecasts.
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