The Reserve Bank has hiked the cash rate for a third consecutive month, taking it from 0.10% to 1.35% since May.
July’s increase of 0.5 percentage points, or 50 basis points, was widely predicted by the market, but AMP senior economist Diana Mousina says the hike could still come as a shock to some households.
“It’s going to be a tough time for households over the next few months,” Mrs Mousina told Smartline. “We’ve had 125 basis points’ worth of rate hikes so far.”
Ms Mousina said a person whose taken out an average home loan in Australia, which reached $615,000 in May according to the Australian Bureau of Statistics, could see their loan repayments rise by thousands of dollars a year based on the rate hikes so far.
It’s the fastest back-to-back increase in rates since 1994, Ms Mousina said, with AMP forecasting a further 50 basis point increase next month, which would take the cash rate to 1.85%.
This at a time when the cost of other non-discretionary products like fresh food, energy and petrol are also soaring in cost.
Analysis conducted with the Smartline home loan repayment calculator found the combined three rate hikes will add around $429 a month for a household with a $615,000 mortgage.
|Combined interest rate increase of 1.25%|
|Mortgage size||Repayment increase|
|$615,310 (Avg. new loan, May)||$428.58|
In this calculation, the borrower is an owner occupier paying principal and interest with 30 years remaining on their loan. It assumes an average variable interest rate of 2.86%, according to April RBA figure. The calculation does not factor in loan fees and charges, or any principal paid down over time.
In a statement following the announcement, RBA governor Philip Lowe acknowledged household budgets are under pressure from higher prices and higher interest rates, but signalled further rate hikes were necessary to get inflation lower.
“One source of ongoing uncertainty about the economic outlook is the behaviour of household spending,” Mr Lowe said.
“Housing prices have also declined in some markets over recent months after the large increases of recent years.
“The board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.”
Mr Lowe said the size and timing of future interest rate increases will be guided by economic data in the months ahead, with quarterly inflation data to be released later this month.
In a press conference following the rates decision, Treasurer Jim Chalmers said the economic pain will get worse before it gets better.
“We understand that this is really challenging news for Australians who are already doing it tough,” Mr Chalmers said.
“Our mortgage repayments will now eat up an even bigger part of households budgets which are already stretched because of the skyrocketing costs of essentials.
“Just because this was expected today it doesn’t mean it will be any easier for people to cop.”
The RBA expects annual inflation to peak at 7% later in the year, up from the current 5.1%.
PropTrack economist Eleanor Creagh said the RBA would continue to front-load the rate hike cycle.
“The 50 basis point rate hike for the second month in a row highlights that commitment towards getting ahead of the curve, with respect to inflationary pressures,” Ms Creagh said.
The RBA notes inflation in Australia is high, but not as high as it is in many other countries – blaming global factors for much of the increase in inflation here.
AMP says back-to-back 0.5 percentage point rate hikes are consistent with the stepped-up pace of tightening from central banks in New Zealand, Canada and the US.
The US is experiencing its highest annual inflation rate in four decades, hitting 8.6% in May.
Ms Mousina says she would expect to see inflation fall faster in Australia than in the US, despite both countries’ central banks taking the same approach.
“Australian households are much more leveraged in terms of the amount of housing debt they hold relative to income than US households,” Mrs Mousina said.
“US households also tend to fix their mortgages for a much longer rate of time.
“In the US you could fix for 30 years if you wanted to, where as in Australia there are more households that are on variable rates and we fix for shorter periods of time so the rate rises that we’ve had will have a much quicker impact on households than they will in the US.”
See how much your mortgage repayments could rise using the Smartline loan repayment calculator
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