As was widely expected, the Reserve Bank of Australia (RBA) raised the cash rate at its February monetary policy meeting, making it nine consecutive hikes in nine meetings.
After all, the Australian Bureau of Statistics (ABS) recently announced the consumer price index jumped 7.8% over the year to December, driven by soaring electricity prices and the rising cost of holiday travel and accommodation.
That’s the biggest annual jump since 1990 and, more importantly, considerably higher than the RBA’s target range of 2-3%.
This latest hike will make life harder for homeowners, as lenders are expected to pass it on in full to their variable-rate customers, increasing the size of their monthly repayments.
The RBA’s move also isn’t great news if you are in the market for a new property. That’s because higher interest rates weaken your borrowing capacity, shrinking your home-buying budget.
How do higher interest rates combat inflation?
Given all this, you might be wondering exactly how higher interest rates are supposed to bring down inflation.
The reason higher rates fight inflation is by raising the cost of borrowing. As a result, people and businesses should spend less; lower spending should dampen demand; and lower demand should put downward pressure on prices.
However, higher interest rates also reduce economic activity so the RBA has to tread a fine line between returning inflation to target and slowing down growth too much.
To further complicate matters, there’s an average three-month lag between when the RBA raises rates and its impact on borrowers’ repayments and thus the economy.
Is there a light at the end of the interest-rate tunnel?
That lag effect is one of the main reasons why Commonwealth Bank’s head of Australian economics, Gareth Aird, believes the RBA will now pause its interest rate hikes.
“There is a lag effect on previous rate hikes and large volumes of fixed-rate mortgages expiring this year and higher monthly borrowing payments should cool demand,” he said.
“Taking the cash rate further into restrictive territory by the RBA could prove recessionary and counterproductive.”
While the other major banks agree that we’re approaching the end of the RBA’s latest tightening cycle, they’re are a little less optimistic than Commonwealth Bank:
What’s more, NAB’s most recent monthly business survey suggests Australia reached a peak in inflationary pressures during December, with expectations that price rises should ease in the coming months.
That’s consistent with the RBA’s November quarterly statement on monetary policy, which forecast that inflation would peak at 8% in the December quarter, before declining gradually to a little above 3% by the end of 2024.
Looking to lower your borrowing costs?
Despite the rising rate environment, many Australian borrowers are refusing to take these rate hikes lying down – with the most recent ABS data showing over $19 billion worth of home loans were refinanced in December 2022.
ABS spokesperson Sean Crick said there have been record levels of refinancing, for both owner-occupiers and investors, in recent months.
“Borrowers continued to switch lenders for lower interest rates as the RBA’s cash rate target rose,” he said.
While refinancing can help slash your monthly repayments, it’s not suitable for every borrower and does come with costs attached. An expert mortgage broker like Shore Financial can help you weigh up your options, so you can be sure refinancing is the right move for you.
Want to refinance your home loan? Shore Financial can help. Call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form to get started.
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