Interest rate rise: RBA lifts interest rates to 0.35% in pre-election hike

The Reserve Bank of Australia has increased the official cash rate by 25 basis points to 0.35%, delivering borrowers a double-whammy budget hit as the cost of living soars.  

Handing down the first interest rate hike in nearly 12 years, RBA governor Philip Lowe said now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place during the pandemic.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected,” Mr Lowe said.

“There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

It marks the first in what’s expected to be a series of interest rate rises after data released last week confirmed what many households already knew – prices are rising, and rising fast.

According to the Australian Bureau of Statistics, the Consumer Price Index accelerated 5.1% over the year to March – the fastest pace since the GST was introduced in 2000 – as the cost of food, fuel and housing surged.

And that’s before factoring in renewed supply chain disruptions caused by the latest COVID lockdowns in China, which are expected to push up the price of goods further.

Releasing significantly upgraded economic forecasts on Tuesday, Mr Lowe said headline inflation was now expected to reach 6% by the end of the year, well above its previous forecasts of 3.25%.

Stripping out some of those volatile, one-off price movements, underlying inflation is already running well above the RBA’s 2% to 3% target range, hitting 3.7% annually in the March quarter. Mr Lowe noted underlying inflation is expected to reach 4.75% by the end of 2022, signalling more rate hikes are on the way.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead,” Mr Lowe said.

“The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”

The broad-based inflationary pressures appear to have caught the RBA off guard just two weeks after the minutes of the last meeting showed the board would wait for wages data (released later this month) before raising the cash rate.

PropTrack economist Paul Ryan said not moving now could have been seen as political.

“By moving today, rather than waiting for further data, the RBA is signalling that it will intervene to curb stronger-than-expected inflationary pressures, despite the ongoing federal election campaign,” Mr Ryan said.

“While the RBA seeks to remain independent from politics, failing to adjust policy may have been viewed as a greater political intervention.”

The last time the RBA lifted rates during an election campaign was in November 2007, when former Prime Minister John Howard went on to lose the election and his own seat.

What the rate hike means for borrowers

When the RBA raises the cash rate, lenders typically pass that on in full to customers with a variable interest rate home loan.

That means many of these borrowers will soon see their mortgage repayments rise, if they haven’t already.

For a borrower with an average variable mortgage rate of 2.92%, based on February RBA data, a 25 basis point increase could cost an additional $68 a month on a $500,000 mortgage.

For a $750,000 mortgage, that’s the equivalent of around $102 extra a month, or $135 a month for a million dollar mortgage.

In this calculation the borrower is an owner occupier paying principal and interest with 30 years remaining on their loan. It does not factor in loan fees and charges.

While it may not seem like much, economists expect a series of interest rate hikes in the months ahead will take the cash rate anywhere from 1% to 1.5% by the end of the year.

Here’s a snapshot of where the big four banks expect interest rates will eventually reach.

Forecasts current at time of publication on 3 May 2022.

Recent analysis by realestate.com.au using the Smartline loan repayment calculator showed borrowers who have stretched themselves to  get into the hot housing market could see their mortgage repayments rise by hundreds of dollars a month if the Reserve Bank of Australia lifts rates in line with these forecasts.

It’s bound to come as a shock to many borrowers who, up until recently, had expected interest rates would remain on hold until at least 2024, according to the RBA’s own forward guidance.

What it means for housing

The expectation of higher interest rates has already started to weigh on property price growth, according to PropTrack’s latest Home Price Index.

In April, Australian home prices rose 0.13% nationally, the slowest monthly pace of growth since the beginning of the COVID-19 pandemic.

Annual property price growth has now slowed to 16% nationally, down from a 23% annual rate in December.