The Reserve Bank increased mortgage holders’ interest rates by another 0.5 percentage points, giving Australian house borrowers their fifth consecutive monthly interest rate hike.
The most recent 50 basis point increase in the cash rate raises it from its previous six-year high of 1.85 percent to a seven-year high of 2.35 percent.
For the first time since it started releasing a target interest rate in the early 1990s, the RBA has now increased the cash rate for five consecutive months.
Australians with mortgages have already seen rate increases from the central bank totaling 2.25 percentage points in May, June, July, August, and now September.
That seems to be the year’s sharpest run of hikes since 1994.
According to Reserve Bank Governor Philip Lowe, this would not be the final rate increase during this period of tightening monetary policy, with inflation predicted to reach a fresh 32-year high in 2022 as consumers continued to spend.
He said on Tuesday that “the board intends to hike interest rates more over the months ahead, but it is not on a pre-set path.”
The board’s assessment of the forecast for inflation and the labour market, together with the incoming statistics, will determine the magnitude and timing of future interest rate rises.
All the major banks have predicted a rate hike of 50 basis points for September, according to Treasurer Jim Chalmers, who told Parliament that the most recent increase will be “quite bad news for a lot of Australians with a mortgage.”
Again, nobody should be surprised since the bank has warned of further rises, he said.
“It doesn’t make it any easier for individuals that we knew it was coming,” said the speaker. It’s difficult.
Family finances will be put under further pressure as a result. Many Australians, who are already under a lot of stress, will feel the effects of this.
The monthly mortgage payment for a borrower with an average $600,000 mortgage would increase by $173 as the central bank fights the worst inflation since 1990 and borrowers contend with the worst cash rate since February 2015.
All the major banks have predicted a 50 basis point rate hike for September, according to Treasurer Jim Chalmers, who told Parliament that the most recent increase will be “quite unpleasant news for a lot of Australians with a mortgage.”
With the most recent increase, this borrower would have seen a $660 increase in monthly mortgage payments since the beginning of May.
As a common variable mortgage rate increased to 4.29 percent from 3.79 percent, the average cost of house loan service is expected to rise to $2,966 from $2,793 in the coming weeks.
Repayments were $2,306 only four months ago, when the cash rate was still a record-low 0.1 percent and the Commonwealth Bank was still providing variable mortgage rates of 2.29%.
This is taking place just three weeks before the fuel excise doubles once again to 44.2 cents per litre, which may cause average unleaded gasoline prices to once again exceed $2 per litre starting on September 29.
The previous Coalition government’s $3 billion six-month lowering of excise to 22.1 cents per litre has been criticised by both Prime Minister Anthony Albanese and Dr. Chalmers.
The Australian Competition and Consumer Commission, responsible with preventing price gouging, found that despite the excise tax being cut in half, the average price of gasoline still increased to $2.10 per litre in June due to increasing crude oil costs.
Even when the excise tax was reduced, prices still reached a 14-year high, according to Gina Cass-Gottlieb, chairperson of the ACCC. She expressed worry that fuel merchants would face difficulties in three weeks.
In the days before, on the day of, or after the reinstatement of the full amount of gasoline tax, she stated, “We will be engaging with fuel wholesalers and retailers to stress that we do not anticipate to see unusual or extraordinary wholesale and retail price hikes.”
Living expenses are becoming more of a burden in tandem with increasing variable mortgage rates.
The largest mortgage lender in Australia, the Commonwealth Bank, anticipates that the RBA will increase interest rates once more in November by a lesser 0.25 percentage points, bringing the cash rate to 2.6%.
This would be just over the Reserve Bank of Australia’s (RBA) neutral threshold of 2.5%, when monetary policy would be seen as having a tightening tendency intended to slow down economic activity.
The head of Australian economics at the Commonwealth Bank, Gareth Aird, said that the RBA was almost done hiking interest rates.
He said that “certain new features of the governor’s comments convey the sense that the board will decrease the pace of rate increases from here on out and that a halt in the tightening cycle may not be too far away.”
But according to ANZ, the cash rate will grow by 0.5 percentage points in October and on Melbourne Cup day to reach a 10-year high of 3.35 percent by November.
However, David Plank, head of Australian economics at ANZ, said it was possible that the cash rate would exceed 3% in 2022, albeit with more gradual rate increases.
In light of the state of the labour market, he added, “We see little reason to change our expectation that the cash rate will be above 3% by the end of the year.”
But compared to our present pace of 50 basis points in both October and November, “the route to that 3 percent-plus level may be a bit less steep.”
When the one-time impact of the GST’s implementation in 2000 was removed, inflation in the year to June soared by 6.1%, the worst rise since 1990.
The RBA expects headline inflation to reach a 32-year high of 7.75 percent later this year, despite the consumer price index being more than twice its 2 to 3 percent goal.
Australia’s inflation is at its highest level since the early 1990s, and Dr. Lowe expects it to rise much more in the coming months.
Since headline inflation has risen at a rate that is now more than twice as fast as the 2.6% wage price index, most employees are actually seeing their real wages decline.
Despite companies’ struggles to fill positions, a low unemployment rate of 3.4% in July—the lowest since August 1974—has not yet resulted in wider pay rises, but the RBA is keeping an eye out for indications of developing wage inflation.
According to Dr. Lowe, wage growth has started up from its previous low point, and labour expenses are rising quickly in certain areas.
The board will continue to pay careful attention to both the development of labour costs and the price-setting behaviour of enterprises in the next term given the tight labour market and the upstream pricing pressures.
Due to the banks’ need to determine a prospective borrower’s capacity to deal with a 3 percentage point rise in variable mortgage rates, an Australian earning an average full-time wage of $92,030 is now unable to get a loan for an average amount of $600,000.
According to CoreLogic statistics, Australia’s median home and unit price declined 1.6% in August to $738,321, which was the worst monthly fall since January 1983.
As variable mortgage rates rise and rents rise by double-digit percentages from the city centre to the suburbs, borrowers aren’t the only ones struggling.
According to statistics from SQM Research, Sydney city weekly rentals increased by 12.9% or $98 to $860.81 in the three months leading up to early September.
Tenants in Liverpool, 38 kilometres south-west of Sydney, had their quarterly rent increase by 10.1%, or $43 a week, to $478.66 in a neighbourhood with a low 1.3% vacancy rate. The surrounding suburbs are also seeing double-digit rent hikes.
According to Everybody’s Home spokesman Kate Colvin, steep rent hikes are occurring at the same time as food and fuel prices are rising.
The twin whammy of record low vacancies and soaring rents make it hard to locate a substitute, more affordable house, she added, calling the situation a social catastrophe and an economic catastrophe.
Renters with low incomes are paying the price for the country’s inflation problem.
Both unfair and foolish, this is.
However, rate increases have so far been unable to dampen overall consumer activity, as evidenced by the Australian Bureau of Statistics’ report on spending growth of 18.4% in July.
Spending on clothing and footwear increased by 45 percent over the course of the year, compared to 34.9% for cafes and restaurants.
Dr. Lowe predicted that consumer spending would experience a lag effect and take some time to slow down.
According to him, household spending patterns continue to be a significant source of uncertainty.
With the full effects of higher interest rates still to be felt in mortgage payments, higher inflation and higher interest rates are putting pressure on household budgets.
For those who haven’t yet had to make spending cuts, subsequent rate increases in August and September may start to bite.
In light of the Reserve Bank’s indications that it is concerned about a slowing domestic economy, KPMG Chief Economist Brendan Rynne predicted that this rate cut might be one of the final ones in this tightening cycle.
According to Dr. Rynne, “Today’s statement by the RBA governor has some noticeable differences when compared to the August board meeting statement,” including a recognition that the world economy is still getting worse and a reference to China’s domestic economic difficulties.
The RBA has also acknowledged that while our high terms of trade have been helping to boost national incomes, commodity prices are now declining, which is likely to be one factor contributing to the impending slowdown in our own domestic economy.
The Reserve Bank noted that the world economy was threatened by China’s Covid restrictions and Russia’s invasion of Ukraine.
The report stated that “the outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in the majority of countries, Russia’s invasion of the Ukraine, and the Covid containment measures and other policy challenges in China.”
However, Australia has a current account surplus for the thirteenth consecutive quarter thanks to higher export revenues than import costs.
Due to increased coal demand and the reopening of the border to foreign tourists, Australia’s terms of trade—the ratio of export to import prices—rose by 4.6% over a three-month period, increasing the current account surplus by $15.55 billion to $18.324 billion.