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RBA could hike as soon as NEXT WEEK: What it means for you

·5-min read
RBA governor Philip Lowe and Australian currency.
The RBA could hike rates as soon as next week, according to some economists. (Source: Getty)

The Reserve Bank of Australia (RBA) is expected to hike interest rates, with many of the major banks predicting it will happen in June this year.

But, Westpac chief economist Bill Evans told ABC Radio the bank was expecting the RBA to hike as much as 0.4 per cent.

This would be a major rate hike for the central bank which would normally only make 0.25 per cent moves at a time.

"There is considerable speculation that they'll move on May 3, but I think that's really been ruled out by the guidance that we've seen from the Reserve Bank about wanting to see data over the coming months," Evans said.

"We did expect that they'd only go by 0.15 [percentage points] but now, with this much stronger inflation environment, much stronger labour market, I think the need is there to go faster than that.

"So a first move of 0.4 [percentage points], and then settle back into 0.25 [percentage point] moves in most of the months between now and the end of the year."

RBA might hike next week

However, not all economists agree the bank will hike with such a large move, but rather start smaller, earlier.

Betashares chief economist David Bassanese said he believed the RBA could hike as soon as next week at the bank’s May meeting.

“Given heightened global supply chain bottleneck problems, and more aggressive rate hikes expected in the United States, however, I now think the RBA should, and likely will, raise interest rates next week by 15 basis points [bps] – the case to hike is so obvious it need not feel bound by next month’s wage report,” Bassanese said.

“Indeed, while inflation pressures are building in Australia, they remain less acute than in the United States – accordingly we don’t need to risk jarring economic sentiment with a ‘shock and awe' 40bps move next month.”

Bassanese said a small rate hike at the May meeting next week would allow for a more gradual increase and would be softer for Aussies to absorb.

“All up, I think the RBA should and will conclude it makes more sense to start off slow with 15bps next week following the CPI, followed by a traditional 25bps move in June,” he said.

“Indeed, the only real argument for delay now is the current federal election – as was last the case in 2007, I think this is another good opportunity for the RBA to again demonstrate its independence.”

What a rate hike will mean for you

There is little doubt banks will pass an interest rate hike on to customers and mortgage holders.

Canstar analysis found if the cash rate reached 1 per cent this year and lenders passed on the hike in full, the average variable rate would rise from 2.99 per cent to 3.89 per cent.

“This would see monthly repayments for the national median home value of $805,621 rise by $322 per month to $3,036, costing borrowers almost an extra $4,000 per year and more than $116,000 in interest over the life of their loan,” Canstar group executive, financial services, Steve Mickenbecker said.

Those living in Sydney would feel the burn the most.

The average home price in Sydney is $1,403,154. If a homebuyer put down a 20 per cent deposit on a home of that value, their loan would be $1,122,523.

The cash rate hitting 1 per cent, up from 0.1 per cent, would mean a $561 increase in monthly repayments - or an extra $202,178 in interest costs over a 30-year loan.

In Melbourne, the average house value is $999,037. The loan amount would be $799,230 with a 20 per cent deposit.

Monthly repayments could increase by $400 - adding $143,949 in interest over 30 years.

In Brisbane, the average home price is $856,731 and, based on the same calculations made above, monthly repayments could rise $343.

This would see interest added to the loan over 30 years of $123,444.

The average price for a home in Adelaide is $658,446 and on a loan amount of $526,757, a rate increase could see repayments rise $264 a month and add $94,874 in interest repayments over the life of the loan.

In Hobart, the average price for a home is $791,587 and, based on that, a rate rise could see repayments rise $317 a month. This would add $114,058 in interest costs over 30 years.

The average home price in Perth is $568,108, and a home of this value could see monthly repayments rise $227 and add $81,858 in interest costs.

In Canberra, the average home price is $1,055,812 and, with a loan amount of $844,650, an interest rate hike could add an extra $422 to monthly repayments.

This would add $152,130 in interest payments over 30 years.

In Darwin, the average home price is $568,647. A cash rate of 1 per cent could see monthly repayments rise by $228 and add $82,079 in interest costs over 30 years.

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