Where are interest rates heading?

The Reserve Bank has raised interest rates by 0.5 of a percentage point, taking its cash rate target to 2.35 per cent making this the fourth double interest rate rise in a row, but there are signs it may now slow down the pace of its hikes.

The RBA board on Tuesday lifted the cash rate by 50 basis points to 2.35% – the highest level since January 2015.

KEY POINTS

• The RBA has raised the cash rate by 0.5 of a percentage point for the fourth straight month
• The cash rate target of 2.35 per cent is the highest since the beginning of 2015
• RBA governor Philip Lowe says the board “expects to increase interest rates further over the months ahead”

According to an analysis by RateCity, the latest increase will add a further $216 a month to a $750,000 mortgage. The total increase in monthly repayments on a $750,000 mortgage balance will be $922 since the RBA started lifting the cash rate from its record low of 0.1 per cent in May.

Australia’s central bank has now raised interest rates for five months in a row in its most aggressive rate rises since 1994, when it lifted the cash rate from 4.75 per cent to 7.5 per cent in just five months.

The cash rate of 2.35 per cent is also now at its highest level since the beginning of 2015.

However, there are also some tentative indications the bank may start slowing the pace of rate rises from next month on. For the first time, Mr. Lowe acknowledged that most borrowers had yet to feel the full effects of the rate rises the RBA had already implemented.

However, Mr. Lowe also noted that many households had large financial buffers while saying that most people were having little trouble finding work or picking up extra hours and many were getting large pay rises.

With Russia’s invasion of Ukraine and reduction in gas supplies to Europe, as well as China’s ongoing COVID-19 lockdowns, Mr. Lowe acknowledged it was hard to know how far rates would have to rise to contain inflation without tanking the economy.

A survey of more than 2,600 people by financial comparison service Canstar found a significant split between those struggling with rate rises and those unaffected. Amongst those who have a mortgage, RBA research ahead of its first rate rise showed that 40 per cent would have no increase in their minimum repayments with 2 percentage points of rate rises — although there have already been 2.25 percentage points of rate hikes since then.

Where are interest rates heading in the coming months?

UBS economist George Tharenou interpreted Mr. Lowe’s statement as an indication that rate rises might slow from here.‘We still expect the RBA to slow down the pace of rate hikes to 25 basis points [0.25 of a percentage point] per meeting, and peak at 2.85 per cent in November 2022,” he said, but added that, “risks remain to the upside”.

However, there are still more economists suggesting that this balance involves a cash rate starting with “3” than those who expect official interest rates to peak below that level. Financial markets are split between a 0.25 or 0.5 percentage point increase next month. But market pricing currently suggests a peak cash rate of 3.8 per cent by mid-2023, implying a further 1.45 percentage points of rate rises between now and then.

Source: ABC News

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