Men bought houses last year expecting prices to stay low. The series of RBA rate hikes makes it difficult

The Reserve Bank has raised interest rates for the fourth month in a row, raising its target rate by half a percentage point.

Key points:

• RBA has raised interest rates by 0.5 percentage point
• The target cash rate has now increased by 1.75 percentage points since early May to 1.85 percent
• A cash rate increase since early May will add about $472 per month to a $500,000 loan payment

The RBA has now raised its benchmark interest rate by 1.75 percentage points since the first rate hike in May, with the target rate at 1.85 percent.

In his post-meeting statement, Reserve Bank Governor Philip Lowe said the latest rate hike is unlikely to be the last this year.

“The board expects to take further steps in the process of normalizing monetary conditions over the next few months, but not on a predetermined path,” he said.

“The size and timing of future rate hikes will be guided by incoming data and the board’s assessment of the inflation and labor market outlook.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Besa Deda is chief economist for St George Bank and Westpac Business Bank.(ABC News: Daniel Irvine)

St George Bank chief economist Besa Deda said the Reserve Bank had raised interest rates faster than any time since 1994, but he expected more.

“We think their cash rate could have 3 handles by the end of the year, as inflation is running at its fastest rate since the early 1990s,” he told The Business.

“We expect the Reserve Bank to deliver rate hikes for every board meeting through February next year.”

Follow all updates from the RBA rate decision here

The ‘real risk’ of a recession

Lowe admits it will be a difficult task.

“The board is placing a high priority on the return of inflation to the 2-3 percent range over time, while keeping the economy stable,” he warned.

“The road to achieving this balance is very narrow and shrouded in uncertainty, not least because of global developments.”

Managing Director of EQ Economics and former chief economist of ANZ Bank, Warren Hogan, warned that a recession was a “real risk” if the Reserve Bank raised interest rates too soon.

“I think they just need to be patient with this tightening cycle and try to get this inflation under control for a few years, rather than rushing around and trying to get it over with in a year,” he warned.

He also told ABC’s AM program that many of the threats to the economy were partly made by the Reserve Bank itself.

In particular, he singled out the RBA’s statement to the end of last year that interest rates were unlikely to rise from near zero to at least 2024, which he said lured many into borrowing too much money.

“I think first-time homebuyers are the ones who have the most significant complaints,” he told AM.

“When they first start out, they are the most vulnerable to higher interest rates. And to be told by a central bank that interest rates will stay where they are, no matter how many conditions they put in place, that nuance is lost on a broader scale. Public.

“And now they are facing the most significant monetary policy tightening of the modern era.”

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Reserve Bank reasons behind fourth consecutive increase

Figures from RateCity show the latest rate hike, if passed in full by the bank, would add $140 per month to a $500,000 home loan payment.

Since interest rates started rising on May 3, someone with a $500,000 loan would pay $472 per month more if their bank only matched the RBA’s moves.

‘This is going to be rough’

Man Huynh was one of the first homebuyers to struggle with an unexpected spike in mortgage payments.

Man Huynh said he was told to expect no more than a percentage point rate increase when he buys his first home in October 2021.(ABC News: Rhiana Whitson)

He also owns two adjoining businesses in Footscray, a Melbourne suburb, that sell hot dogs and bubble tea.

With annual inflation hitting 6.1 percent and rising interest rates, Huynh has been hit by various cost pressures at work and at home.

“Everything went up – our bread, our rent, our insurance, everything. Even our wages went up,” he says of his business expenses.

Mr Huynh bought his first home in October last year and, even before today’s rate hike was passed, lender Pepper Money had increased its variable interest rate from 3.8 percent to 5.37 percent.

“It’s going to be rough, we don’t know when it will stop.”

The sharp rise in his mortgage costs was not unexpected for Huynh, who said his mortgage broker told him interest rates would likely only rise by between half to 1 percentage point.

“If you hear that it will only go up by half a percent, then yes, you go and buy the house,” Huynh said.

Mr Huynh said he would have made a different decision if he had known interest rates would rise this hard and fast.

“Definitely, I will postpone my first purchase,” he said.

Mr Huynh’s climbing fees come at a time when business is far from returning to normal, and he has closed his other outlets to focus on his Footscray site.

“We are in front of the train station, we are in prime position, but no one is catching the train, and everyone is still working from home,” he added.

Housing market, consumer confidence falls

The rapid rise in interest rates since early May, combined with the high inflation that fueled the RBA’s move, has seen consumer confidence levels drop to depths typically seen during recessions.

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House prices are also starting to fall rapidly in Australia’s biggest cities, while other parts of the country have also weakened.

“It doesn’t take four Reserve Bank rate hikes to slow new lending, with the latest ABS new loan commitments showing that new housing loans fell in June by 4.4 percent,” said Canstar finance expert Steve Mickenbecker.

“New lending has now fallen below last year’s levels but is still up on pre-pandemic volume.

“With more rate hikes ahead, buyers and sellers are nervous about what’s to come from this year’s spring selling season. Investors, previously the most bullish sector, are leading the way.”

Federal Treasurer Jim Chalmers warned the latest RBA decision would be “stinging”, even though Australian households have been bracing for further rate hikes.

“Families must now make more difficult decisions about how to balance household budgets in the face of other pressures, such as higher food prices and higher electricity prices, and the cost of other basic necessities,” he told parliament just seconds after the RBA’s announcement. . made.

“This decision is not surprising.

“It’s not a surprise to anyone, but it will still sting.”

He argued that the warning signs were clear before the election, and that the federal government’s budget would also take a hit.

Shadow Treasurer Angus Taylor said Chalmers’ comments would be a comfort to Australians who are doing it hard, and demanded more details soon about any living expenses the government is planning.

“This is our fourth straight rate hike, we’ve had our highest inflation since the early 90s,” Taylor said.

“We want to see a plan, we don’t want to wait until the budget.”

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