All bets are off as RBA races to rein in inflation with Melbourne Cup day interest rate rise
Daniel Butkovich, Property Journalist
First published 07 November 2023, 02:30 PM
Last updated 07 November 2023, 02:40 PM
At its November board meeting on Tuesday the RBA increased the cash rate by 25 basis points to 4.35% – the highest it’s been in 12 years.
In a post-meeting statement, RBA governor Michele Bullock said inflation was proving more persistent than expected a few months ago.
"The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly," she said.
"The board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe."
Today’s rate rise will mean about one in seven borrowers will be spending more than they earn, according to analysis by the RBA.
While the decision jolted borrowers who thought the RBA had finished raising interest rates, economists and financial markets had tipped a rate hike as a short-priced favourite after data released last month showed inflation wasn’t falling fast enough.
The consumer price index (CPI) rose by a larger-than-expected 1.2% in the September quarter, taking the annual rate of inflation to 5.4%.
While this was down from 6% recorded in the June quarter, it was higher than the RBA expected, prompting another rate rise to slow the economy and ease inflation.
The Reserve Bank has raised interest rates again after the latest data showed inflation wasn't falling fast enough. Picture: Getty
In her first speech as RBA governor last month, Ms Bullock warned that the board had a low tolerance for allowing inflation to return to target more slowly than expected, and would not hesitate to raise the cash rate if the outlook for inflation worsened.
In its August forecasts, the RBA had expected inflation would return to the bank’s 2-3% target range by the end of 2025.
The RBA will release its updated economic forecasts on Friday in its Statement on Monetary Policy, but Ms Bullock said inflation was now expected to reach the top of the target band slower than previously forecast.
PropTrack economist Eleanor Creagh said that inflation was trending downwards, but the higher than expected result meant it would likely return to target slower than expected.
“In order to keep inflation expectations anchored and maintain confidence in returning inflation to the target range within a reasonable timeframe, the Reserve Bank lifted interest rates again today,” she said.
Record high home prices creating headache for RBA
The decision to raise interest rates came after home prices reached new record highs around the country last month, with strong demand for property amid a limited supply of homes for sale outweighing the effects of high interest rates.
Australia’s median home price climbed a further 0.36% in October according to the latest PropTrack Home Price Index, while prices in Sydney reached a record high after rising for 11 consecutive months.
“National home prices reclaimed 2022’s price falls in their entirety last month, with the upswing continuing in October,” Ms Creagh said.
“Record levels of net overseas migration, a challenged rental market, limited housing stock and a slowdown in the completion of new builds are offsetting the impacts of substantial rate rises and the slowing economy, with home prices continuing to lift.”
The RBA has previously expressed concern that rising property prices could cause household consumption to increase – the opposite of what the bank has tried to achieve by raising interest rates.
Research by the RBA has shown that Australian households spend more when housing wealth increases, compounding the problem faced by the RBA as it grapples with persistent inflation.
Home values are now higher than ever in four capital cities — Sydney, Brisbane, Perth and Adelaide — as well as regional Queensland and Western Australia.
How home prices changed around the country in October
Ms Creagh said the housing market recovery wouldn't be derailed by today's interest rate rise.
“This additional increase in interest rates may slow the current pace of home price growth but is unlikely to deter these gains, with strong population growth, tight rental markets and a housing shortfall fuelling further price rises,” she said.
Property prices are expected to rise a further 5% next year, according to the latest forecasts from NAB, even factoring in today’s interest rate rise.
The astounding growth in home values this year has defied earlier expectations of a prolonged downturn, and the RBA has suggested that surging home values could be a signal that higher interest rates weren’t as restrictive as had been assumed.
Rate rise pushes more borrowers into the red
Analysis by the RBA estimates about one in seven borrowers will be spending more than they earn when the latest rate hike flows through.
In its October Financial Stability Review, the RBA estimated almost 15% of owner-occupiers with variable rate loans would have negative household cash flow if the official interest rate reached 4.35%.
“While most borrowers appear well placed to service their debt and cover essential costs during an extended period of higher interest rates, this would change if they became unemployed for a sustained period,” the RBA stated.
Source: RBA October 2023 Financial Stability Review. * Estimated shares of variable-rate owner-occupier borrowers with mortgage payments and essential expenses exceeding their income as at July 2023 under assumptions using the Household Expenditure Measure (HEM) and income growth in line with WPI growth since loan origination. Assumes no changes in expenses or incomes if the cash rate were to change. ** This factors in some other expenses that are excluded from the baseline HEM (mainly private health insurance and private school fees).
More than 40% of variable-rate borrowers only have enough savings to sustain them for three months if they were to become unemployed, the RBA estimated.
The RBA had predicted in August that the unemployment rate would rise to 4.4% by the end of next year, but the bank now expects it to rise more gradually to about 4.25%.
Source: RBA October 2023 Financial Stability Review. * Number of months that mortgage prepayments (offset and redraw balances) can cover minimum scheduled payments and Household Expenditure Measure (HEM) expenses for variable-rate owner-occupier borrowers if they were to lose their entire household income as at July 2023. ** This factors in some other expenses that are excluded from the baseline HEM (mainly private health insurance and private school fees).
The labour market has remained resilient throughout the rate tightening cycle, with the unemployment rate falling slightly to 3.6% in September, which Mortgage Choice CEO Anthony Waldron said had contributed to the RBA's decision to hike interest rates.
"Australians would be disappointed with the RBA's call to raise interest rates yet again, but governor Bullock had made it clear over the last month that another cash rate rise was not off the cards," he said.
Mortgage Choice home loan submission data showed a 3% uplift in refinancing activity in October, indicating borrowers were still seeking better home loan deals amid the high interest rate environment.
"I encourage all borrowers to get on the front foot with their home loan,” he said.
Originally published at: https://www.realestate.com.au/news/all-bets-are-off-as-rba-races-to-rein-in-inflation-with-melbourne-cup-day-interest-rate-rise/
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