February cash rate announced

Australia’s central bank has confirmed a cash-rate hike to start 2023, as sundry economists had expected.

The fine line between pleasure and pain is now firmly skewed towards the latter, as the Reserve Bank of Australia (RBA) called its ninth consecutive hike, upping the official cash rate to 3.35 per cent on Tuesday (7 February).

The extra 25 basis points (bps) from December’s pre-holiday 3.10 per cent rate didn’t surprise many economists, with 3.35 per cent – the highest cash rate level since late 2012 – largely expected to increase further at the next RBA board meeting on Tuesday, 7 March 2023.

February’s rate announcement followed last May’s 25-bp increase, then 50bp hikes in June, July, August and September before returning to 25-bp hikes in October, November and December 2022.

There was no rate call in January, as is always the case, but which – given the current rising-rate environment – might have had many mortgage holders counting their blessings and buying a lottery ticket.

The latest hike means morgators have been slugged an extra 325 bps to their home loans over the past 10 months, all part of the RBA’s tightening cycle to curb high inflation.

After January inflation figures hit a new 33-year high, Australia’s major banks had largely anticipated 25-bp jump, with scope for a higher 40-50bp increase depending on various factors.

In a prepared statement following the announcement, RBA governor Philip Lowe commented: “The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments.”

“There is uncertainty around the timing and extent of the expected slowdown in household spending.

“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. “Household balance sheets are also being affected by the decline in housing prices.

“Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world.

“These uncertainties mean that there are a range of potential scenarios for the Australian economy,” he said.

Property price falls likely to accelerate

PropTrack director for economic research Cameron Kusher commented: “At the beginning of May 2022, official interest rates were sitting at 0.1 per cent. By the end of 2022, the cash rate had increased to 3.1 per cent.”

“Today, the Reserve Bank lifted rates another 25 basis points.

“As a result of the fastest and most significant interest rate tightening cycle in many decades, the cash rate is the highest it has been since September 2012.

“With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls.

“Nationally, we are forecasting prices to fall by a further 7 per cent to 10 per cent by the end of this year.

“This forecast is based on the assumption that the cash rate will see a total increase of 50 basis points from its December 2022 level (3.1 per cent).

He added: “With the RBA’s hike of 25 basis points today, we’re expecting an additional rate rise of 25 basis points, or thereabouts, likely to follow next month.

“Thereafter, we expect rates to remain on hold, with the potential for them to be reduced in late 2023 or early 2024.

“We anticipate these further interest rates rises will push prices lower. However, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls,” Mr Kusher stated.

Sustained evidence of cooling sought

CreditorWatch chief economist, Anneke Thompson commented: “The Reserve Bank of Australia (RBA) today chose to continue down their path of monetary policy tightening, adding another cash rate increase on top of the eight increases totalling three per cent in 2022.”

“While there are early signs that consumers are now starting to reduce spending, and businesses are far less optimistic about the year ahead compared to 2022, the RBA clearly wants to see some sustained evidence of a cooling economy before pausing any further cash rate increases.

“What the RBA does next will depend heavily on January’s retail trade result.

“Inflation also appears to be moderating, and we should see further drops in the rate of price growth as data is now being measured off 2022 figures, when price rises had already kicked in.

“Another factor that will be key to the RBA board’s decision making is business confidence and conditions.”

Ms Thompson said that CreditorWatch’s own data indicates that business conditions going into the Christmas period were not following the same patterns as pre-COVID times.

“This time, we have recorded falls in average trade receivables in October and only a very slight increase in November. This indicates that the peak of business activity may have already passed around the third quarter of 2022,” she explained.

“Overall, it appears the RBA’s efforts to slow the economy and cool inflation are working. How quickly and deeply this ‘cooling’ is felt by businesses will be key to determining what happens next to the cash rate.”

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