Another big interest rate hike, but the RBA may be ready to slow the pace

The Reserve Bank of Australia has doubled its interest rate for the fourth time in a row, but there are signs it may now slow the rate of hikes.

The RBA on Tuesday raised the cash rate by 50 basis points to 2.35%, the highest level since January 2015.

RBA Governor Philip Lowe said further interest rate hikes would help bring inflation back to the central bank’s target level, although more increases would be needed.

“The board expects interest rates to rise further over the coming months, but not on a predetermined trajectory,” he said.

“The size and timing of future interest rate increases will be determined by incoming data and the board’s assessment of the outlook for inflation and the labor market.”

At its meeting today, the Board decided to increase the target cash rate by 50 basis points to 2.35 percent. It also raised the interest rate on exchange settlement balances by 50 basis points to 2.25 percent – https://t.co/7SpNu8FKJQ

— RBA (@RBAInfo) September 6, 2022

Mr Lowe said the board was committed to returning inflation, which is at its highest level since the early 1990s and is expected to increase further, to the 2-3% range over time.

“It seeks to do this while keeping the economy on an even keel. The path to achieving that balance is narrow and clouded by uncertainty, not least because of global events.”

Mr Lowe noted that an important source of uncertainty remains household spending behaviour.

“Higher inflation and higher interest rates are putting pressure on household budgets, with the full impact of rising interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and house prices are falling in most markets after earlier strong gains.’

He added that people are finding work and earning higher wages, while many households have built up large financial buffers and savings levels remain higher than before the pandemic.

PropTrack senior economist Eleanor Cree said the RBA’s board was still looking to overcome causing high inflation.

“To ensure that inflation expectations remain around the 2-3% target level, the RBA has continued to advance its rate hike cycle,” Ms Cray said.

Tuesday’s move marks the first time the RBA has raised rates for five consecutive months, and an unprecedented fourth consecutive rate hike.

Since May, the RBA has raised rates by 225 basis points. Comparison website Finder estimated that the combined increase would cost the average borrower with an average home loan of $611,000, an extra $801 a month compared to what they were paying in April.

Ms Cree said the fastest rise in cash rates since 1994 had caused house prices to fall across Australia, with Nationally, prices are now 2.7% below their March peak.

“Today’s rate hike will further increase borrowing costs and reduce maximum loan capacity, which will further reduce property prices,” she said.

Despite a large drop projected through 2023, house prices will still be higher than before the pandemic.

More rate hikes are on the way, but the exorbitant hikes may be coming to an end

Economists at three of Australia’s four biggest banks are waiting now the RBA will slow the pace of rate hikes and return to smaller “business as usual” moves of 25 basis points.

Economists at the Commonwealth Bank of Australia believe Tuesday’s move will be the RBA’s latest double hike. They expect another 25 basis point increase in November increases the cash rate to 2.6%adding that there is a risk of reaching its peak of 2.85%.

“We believe that, assuming the RBA pauses for at least a few months in its tightening cycle, with the cash rate at 2.6% or 2.85%, the evidence would suggest that there is no need to continue raising the policy rate.” , – said the head of the Central Bank. said Australian economist Gareth Aird.

“Indeed, an increase in the cash rate is likely to cause a hard landing in the economy.”

The RBA may start to slow the pace of rate hikes. Photo: Getty

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However, ANZ economists believe RBA expects more hikes in October and November take the cash rate up to 3.35%. But they are not ruling out a double hike next month ahead of lower 25 basis points in November and December.

ANZ’s head of Australian economics, David Plank, said Mr Lowe could use Thursday’s speech to signal that the RBA could reduce the size of the hike.

“Regardless of what Mr. Lowe says, the data will be important,” Mr. Plank said. “Given our expectations, we think a rate hike of 50 basis points in October is more likely than 25 basis points.”

Westpac chief economist Bill Evans expects the RBA board to move to a 25 basis point hike from its October meeting.

“The second phase of the tightening process, with successive 25 basis point increases, is expected to continue until February next year with a peak rate of 3.35%,” he said.

National Australia Bank economists expect hikes of 25 basis points in October and November, taking the cash rate to a peak of 2.85% before the RBA pauses to assess the impact of its rapid hikes.

Ms Cray expects the RBA to reduce the pace of tightening at some point, although it remains unclear.

“Given the lagged effect of rate rises, the large proportion of variable-rate borrowers waiting to repay and borrowers with fixed terms that have not yet expired, many mortgage lenders are yet to see their minimum payments rise,” she said.

“As this changes and households are forced to make budget adjustments, discretionary spending is likely to slow.

“This means the RBA is fast approaching a point where caution may be appropriate, but offset by the unenviable task of containing inflationary pressures and maintaining inflation expectations.”

She added that the RBA is well aware of this predicament, noting the challenge of keeping the economy at an “even level” while returning inflation to the target range of 2-3%.

The US Federal Reserve’s actions are expected to weigh on the RBA after Fed Chairman Jerome Powell recently said rate hikes would continue “until the job is done” but also indicated that “at some point” in the tightening cycle it will be appropriate to slow down the rate of increase.