Introduction to Interest Rates
The Reserve Bank of Australia (RBA) has increased the cash rate target by 25 basis points, taking it from 2.35% to 2.6%. This is the sixth consecutive month that the central bank has increased the cash rate in an effort to curb surging inflation. RBA governor Philip Lowe stated that the nation’s inflation is "too high" and that the board’s priority is to return inflation to a 2-3% range while keeping the economy stable.
Understanding Inflation
Inflation is a measure of how much prices for goods and services are rising. Global factors, such as the pandemic and supply chain disruptions, have contributed to high inflation. However, strong domestic demand and the economy’s ability to meet that demand are also playing a role. The RBA is working to balance the economy and bring inflation back under control.
Impact on Mortgage Payments
The latest interest rate hike will affect mortgage payments. For example, people with an average $500,000, 25-year mortgage will pay an extra $76.45 a month. Those with a $1 million mortgage will pay more than $150 extra per month. Since the RBA started lifting rates in May, mortgage borrowers have seen their monthly repayments jump by over $500.
Mortgage Stress
The aggressive monetary tightening by the RBA has led to a significant increase in mortgage stress. According to Roy Morgan research, 942,000 Australians are now classified as ‘At Risk’ of mortgage stress, the highest number since May 2019. If the interest rate is hiked again in November, this number is expected to rise to 1.1 million, or 24.3% of mortgage holders, the highest since July 2013.
Historical Context
The last time interest rates rose this quickly was in 1994, following the recession of the early 1990s. At that time, the RBA raised the cash rate to 7.5% to combat inflation. It wasn’t until August 1996 that the cash rate began to decline. Many Australians are concerned that history is repeating itself, with the RBA committing to further hikes to bring inflation back under control.
Concerns about the Economy
While the RBA is committed to lowering the inflation rate, many Australians and economists are concerned that the consecutive cash rate increases will lead to a recession. They fear that the economy is being put at risk unnecessarily. However, the RBA is closely monitoring the global economy, household spending, and wage and price-setting behavior to ensure that the economy remains stable.
Future Outlook
The RBA anticipates a further increase in inflation over the coming months before it declines back to the central goal. The bank’s central forecast for CPI inflation is around 7.75% over 2022, a little above 4% over 2023, and around 3% in 2024. The RBA will continue to monitor the economy and adjust the cash rate as necessary to achieve its inflation target.
Conclusion
In conclusion, the RBA’s decision to increase the cash rate target is aimed at curbing surging inflation and stabilizing the economy. While the impact on mortgage payments and the potential for mortgage stress are concerns, the RBA is committed to achieving its inflation target. As the economy continues to evolve, it is essential to monitor the RBA’s decisions and their effects on the economy to ensure a stable financial future.
