Yahoo Finance RBA delivers Melbourne Cup interest rate blow for millions
The RBA has hiked the cash rate to 4.35 per cent but is it enough to help with cost-of-living pressures?
The Reserve Bank (RBA) has delivered a blow to millions of Aussie homeowners, hiking the official cash rate by 0.25 per cent to 4.35 per cent in a bid to control spiralling inflation.
RBA governor Michele Bullock said inflation in Australia had passed its peak but was "still too high" and was "proving more persistent than expected a few months ago".
Economists largely predicted the 25-basis-point hike but warned today's move may still have little impact on the huge costs being faced by thousands of businesses and Aussie households.
"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," Bullock said.
Are you concerned about today's rate decision? Contact tamika.seeto@yahooinc.com
"The grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure, therefore, this cash rate rise will have little impact on the prices of rents, fuel, insurance, and utilities," Anneke Thompson, chief economist at CreditorWatch said.
"Instead, this rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors."
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Even Bullock conceded agreement with the International Monetary Fund's (IMF) conclusion that Australia’s economy wouldn’t return to the RBA's 2-3 per cent target until at least 2025.
Borrowers have been under significant financial pressure as the rate remains above the 20-year average, with more than 730,000 mortgages coming off ultra-low fixed rates this year, and another 450,000 following in 2024.
And some experts have gone as far warning today's hike could push Australia into a recession.
"I'm one of the few people that's saying the Reserve Bank does not need to put the rates up," Yellow Brick Road chairman Mark Bouris told 2GB.
"We seem to be willing ourselves to put the rates up ... it's like a hysteria."
Treasurer Jim Chalmers admitted the decision made today a difficult one for those with a mortgage.
The average borrower with a $500,00 debt at the start of the RBA's aggressive attack on inflation will have an extra $76 added to their monthly mortgage repayments.
That's a total increase to repayments of $1,210, according to RateCity, representing a 52 per cent increase on their monthly expense over the past 13 rate hikes.
Those with larger loans of $1 million - which doesn't even cover the cost of an average home in Sydney - will need to find $2,420 every month more than they were 18 months ago.
But Chalmers was steadfast in his argument that the government's economic approach was bringing inflation down and he pointed to some "wild fluctuations" in petrol prices for the "sticky" CPI data.
The treasurer ruled out introducing a cut in the fuel excuse and said he was instead focused on rolling out a $23 billion cost-of-living relief package. You can read our explainer about the Medicare changes and energy rebates here.
Will the RBA hike again in December?
Bullock warned "further tightening of monetary policy" may be required depending on the data and the evolving assessment of risks following quarterly inflation accelerating 1.2 per cent in the three-month period to September.
But if you look to the Big Four banks - CBA, NAB, ANZ, and Westpac - their economists believe today's will be the last rate rise of this year.
And 23 per cent of experts who took part in Finder's RBA Cash Rate survey agree that the peak will be 4.35 per cent.
Interestingly, Another 23 per cent believe the cash rate will peak at 4.6 per cent, which would indicate another interest rate hike is on the horizon.
Australia's economic snapshot
Inflation up 1.2 per cent in September quarter, up from 0.8 per cent in June quarter. Annual rate eased to 5.4 per cent, down from 6.0 per cent in June
IMF predicts inflation won’t return to the RBA's 2-3 per cent target until at least 2025
Unemployment rate eased to 3.6 per cent in September, but this was due to fewer people looking for work
Retail sales rose 0.9 per cent in September, up from 0.3 per cent in August and 0.6 per cent in July
The average Aussie has $40,617 in savings
Home values are trending up but there are more short-term sales at a loss, indicating interest rate pressure
More than 730,000 mortgages have come off ultra-low fixed rates this year, and another 450,000 will follow in 2024
Check out David Koch's simple explainer to understand inflation and the 'vicious cycle' it's creating for struggling Aussies here.
$94k warning for Aussies stuck paying for longer
This comes amid a warning from Canstar that the rate hike will have long-lasting financial ramifications for Aussies who will be stuck paying off loans - and, subsequently, far more interest - for longer.
An extra $266 a month - now needed to cover short-term interest repayments - could have been used to drive down their principal, saving them tens of thousands of dollars in interest fees long-term.
"Making extra loan repayments not only reduces the long-term cost of the loan but also cuts the period of time that borrowers are indebted to the bank and making repayments," Canstar finance expert Steve Mickenbecker said.
A borrower who has 25 years remaining on their loan term and still owes $400,000 could be missing out on $94,426 in interest savings and repaying their loan four years and nine months sooner, according to Canstar.
Borrowers with only 15 years remaining to repay a smaller loan size of $200,000 who aren’t able to contribute an extra $266 per month to their repayments could likewise be missing out on $26,288 in interest savings and could have repaid their loan three years earlier, in just 12 years.
“Many borrowers who had their heart set on repaying their loan earlier have had to ditch the idea to simply meet higher interest rates and the cost-of-living pressures," Mickenbecker said.
But the path to earlier "financial freedom" may be tethered to their loans for up to six years longer, with the advice to repay quicker "hard to preach" with borrowers "doing it tough".
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