Australians will have their finances hit just before Christmas with the Reserve Bank of Australia raising interest rates by 0.25% again in December.
In the final decision for 2022, the RBA raised rates for the eighth consecutive month, after hikes began in May from a record low of 0.1 percent.
It means rates have risen again from 2.85% to 3.1%, which will take the official cash rate to its highest level in 10 years.
Major banks ANZ, NAB and Westpac had forecast a rise of 0.25 per cent, while the Commonwealth Bank has also tipped for the same increase, although it said there was a small chance of “no change”.
A 0.25% increase would bring the average discounted mortgage rate to 6.55%, up from 3.45% in April.
It means months of rising interest rates have seen mortgages of $750,000 reduced by an extra $1,418 in monthly repayments.
Another 0.25 percent increase would typically add $75 to monthly repayments for every $500,000 borrowed, according to RateCity, while homeowners with a $1.5 million loan would have seen their repayments increase by $2,500 from of May
PropTrack senior economist Eleanor Creagh said interest rates had now reached their highest level since 2012, with the RBA trying to tackle high inflation while monitoring domestic economic conditions and global risks.
“With inflation remaining high and increasing evidence of labor market tightness, the RBA has continued to raise the cash rate to ensure inflation expectations remain anchored,” he said.
“The fastest rise in 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.
“Domestic prices are now 3.81 percent below their March peak after falling for an eighth consecutive month amid headwinds from monetary tightening.
“The more expensive markets of Sydney and Melbourne are leading the price declines. In Sydney, prices are down more than 6% from the highs and lows recorded in November last year.
“With further rate hikes on the horizon, borrowing costs will continue to rise and maximum borrowing capacity will be further reduced, squeezing buyers’ budgets.”
He added that homebuyers had seen the amount they can borrow drop by 20 percent.
CreditorWatch chief economist Anneke Thompson said the eighth consecutive rate hike would put “undeniable financial pressure on Australian households”.
“Combined with the Budget’s forecast of rising prices for consumer goods, housing and energy, and lackluster wage growth, this latest cash rate hike all but guarantees that the confidence of consumers will weaken as we enter the Christmas retail period,” he explained.
“Data and forecasts released in the second half of October point to difficult economic conditions in 2023. The RBA board is likely to have carefully considered labor force data, which showed the unemployment rate s “has stagnated at 3.5 percent, job growth has slowed dramatically, and job openings have stopped increasing.”
Canstar’s analysis of lenders’ interest rates shows that existing borrowers could give banks $155 more than new customers each month by paying a higher interest rate.
RBA data as recently as October shows there is a 0.51% difference in interest rates paid by existing borrowers compared to new customers who receive attractive special offers.
New borrowers are securing an average variable rate of 4.58 per cent compared to the much higher rate of 5.09 per cent offered to existing borrowers.
On a $500,000 loan over 30 years, the difference in monthly repayments between these two rates amounts to $155.
Switching to a new lender in October was down 1% from the previous month with less than $18 billion in refinanced loans.
Borrowers faced a 38% increase in home loan repayments from April to November, adding more than $809 to repayments on a $500,000 30-year loan or $1,618 on a 30-year loan 1 million dollars.
Canstar group chief executive Steve Mickenbecker said rate rises were not on any Santa’s wish list.
“Borrowers sitting in their homes, expecting an inflated cost of Christmas this year and already paying hugely inflated home loan repayments, will be looking for ways to enjoy the season while protecting their long-term financial viability” , he said.
“With the Reserve Bank reporting that existing borrowers are paying an interest rate half a percentage point higher than new borrowers, staying tight is costing homeowners dearly. On a $500,000 loan over 30 years, that interest rate difference can save you $155 a month. Maybe it’s time to become a new borrower elsewhere.”
AMP chief economist Shane Oliver had backed a rise of 0.25%.
“Still high inflation, strong jobs and wages data and the absence of an RBA meeting in January are likely to push for another 0.25% rise in December to 3.1%, with the risk of a further increase to 3.35% in February, but by the end of 2023 we expect weak growth and a sharp fall in inflation to prompt the start of rate cuts,” he said.
Bendigo Bank chief economist David Robertson said the RBA was “almost certain” to raise rates by 0.25 per cent this month, adding to up to 3 per cent hikes since May.
“Given the latest CPI data, they will likely raise rates again in February, before a pause. Global supply is slowly improving, which may see rates stabilize between 3% and 3%,” he said.
REA Group’s Cameron Kusher added that the RBA had been clear there was still work to be done to control inflation and said he expected interest rate rises in December, as well as in February and March this year coming and then a period of stability.
Last month, RBA Governor Philip Lowe flagged further interest rate hikes after issuing an inflation warning, saying Australia was at risk of a “severe recession” if the don’t raise interest rates to combat the cost of living.
“The eel of inflation will be with us for longer (if we don’t raise rates) and the eventual rise in interest rates needed to reduce inflation will be even greater, increasing the risk of a seed, recession severe and a sharp rise in unemployment,” he said during a speech to business leaders in Hobart in November.
Inflation is currently at 7.3%, which the RBA has been trying to tackle as the cost of living rises are at their highest level since the 1990s.
Dr Lowe indicated that rate hikes could become more aggressive in response to rising inflation.
“If we have to raise rates again to ensure a return of inflation to the target, we will do it,” he said.
“Similarly, if the situation requires us to stand still for a while, we will.
“Given the uncertainties about the outlook, we will be watching very carefully how the economy and inflationary pressures evolve over the summer.”
However, there could be some relief in sight for landlords, with some experts predicting the RBA will pause its aggressive round of rate hikes from next year.
HSBC senior economist Paul Bloxham said there was a real chance the RBA could halt rate rises in early 2023, although rises could return later this year if the problem of inflation persists.
However, Morgan Stanley has tipped rates to keep rising.
“Inflation is likely to show some re-acceleration, wage growth should continue to pick up, and while spending and unemployment are likely to start to turn around, both will remain quite strong,” the bank said.
“We expect a further 25 basis point hikes from the RBA in February and March to a terminal cash rate of 3.6 per cent.”
As for Australia’s big banks, CBA has forecast rates will remain at 3.1%, while Westpac and ANZ expect them to reach 3.85% in May.
It comes as the looming “mortgage cliff” is set to hit next year with at least $270 billion in mortgages coming from historically low fixed interest rates.
“Around 35 per cent of outstanding housing credit is fixed rate,” the RBA said in its financial stability review in October. “About two-thirds of these loans are due by the end of 2023.”
Dr Lowe issued a stunning apology to Australians who took out a mortgage, during a period of record property prices, no less, based on the RBA’s repeated insistence that the official cash rate would not rise until to 2024.
Read related topics: Bank of reserves