The ink has barely dried on the RBA’s last interest rate hike – but according to experts, things are about to get “a lot worse” for Aussies.
The Reserve Bank of Australia is poised to hike the official cash rate for the second month in a row today, marking the first back-to-back rate rise in 12 years.
Last month, the RBA raised the cash rate by 25 basis points, from the historic low of 0.1 per cent to 0.35 per cent.
Another rate rise after this afternoon’s meeting is all but certain, with experts predicting a rise by either 25 or 40 basis points, which could see the cash rate reach 0.75 per cent within hours.
But clues from the RBA’s May meeting – as well as predictions from countless finance experts – indicate today’s hike will be just the tip of the iceberg.
Three words reveal months of pain ahead
A quick read through the Board’s May meeting minutes shows that more rate hikes are inevitable, with the RBA forecasting the cash rate will increase to around 1.75 per cent by the end of 2022.
But it’s the RBA’s wording itself that reveals the most alarming clues of what’s coming our way.
The word “risk” was repeated six separate times, while the Board referenced “uncertainty” nine times, and “inflation” a whopping 39 times.
They are not words that are seen when things are looking rosy, or when a quick turnaround is on the horizon, which is why some insiders expect the cash rate to climb even higher to 2.5 per cent by the end of the year, in a desperate bid to bring inflation back under control.
But that comes with a risk of its own, with KPMG’s senior economist Sarah Hunter telling The Guardian that while the RBA must bring the cash rate to a normal level “as soon as practically possible”, it must do so “without creating ‘climb shock’ by moving rates too fast, too soon”.
‘A lot worse’: Australia on the brink
In this month’s RBA Cash Rate Survey by comparison site Finder, 86 percent of economists and experts expect a hike, while 28 percent believe there will be at least two cash rate increases before the end of the year.
Finder head of consumer research Graham Cooke said Australians were already feeling the pinch, adding there was a chance the June rate increase will be higher than expected – 40 basis points rather than 25.
“The economy is at a precipice and some families are really starting to struggle financially with the cost of living – and for those with a home loan, it could get a lot worse,” he said.
“Lifting the cash rate is good news for savers, and will help to slow Australia’s runaway property market, but those with a home loan are in line for several further cost increases.”
And according to new research by Mozo, three-quarters of borrowers have already been preparing for rate hikes.
But Mozo’s analysis reveals that if lenders increased home loan rates by 40 basis points, borrowers paying principal and interest on an average $500,000 loan over 25 years could see their repayments increase by $107 per month, climbing from $2431 to $2538.
Mozo’s research found almost a third of borrowers have been putting extra money into their savings accounts to get ready for higher interest rates, while almost one-quarter have been stashing cash in offset accounts to help reduce mortgage repayments.
Meanwhile, PropTrack economist Paul Ryan told news.com.au another rate rise would impact house prices and affect borrowers both in the short and long-term.
“We’re likely to see continued slow growth in housing prices as the cash rate increases,” Mr Ryan said, but added it was difficult to predict exactly when and how much it will affect the market.
“It normally takes a little while for interest rate rises to start to affect (house) prices,” he said.
“I think, while it’s correlated, it’s more coincidental that we saw these first housing price falls in May, right after the RBA raised rates for the first time in over a decade.”
He said the price slump was caused less by the RBA’s decision and more as a side effect of inflationary pressures and buyers growing more cautious in anticipation of a rate rise which caused a “dramatic slowdown in growth that has culminated in a fall”.
– with Georgina Noack
Originally published as Reserve Bank set to raise interest rates for second time in 35 days with economy ‘at a precipice’