RBA tightens the mortgage screws, hiking rates to an 18-year high
In the rates that stopped the nation, the Reserve Bank of Australia (RBA) today raised the official cash rate (OCR) to an 18-year high of 4.85%. The decision was widely anticipated by economists and financial markets. However, there was some dissent within the RBA, with six board members voting for the hike and three against. The post RBA tightens the mortgage screws, hiking rates to an 18-year…
The Reserve Bank of Australia (RBA) increased the official cash rate (OCR) to 4.85% on Tuesday, reaching an 18-year high. This decision was expected by economists and financial markets, but the RBA had six board members vote for the hike and three against. In its statement, the RBA highlighted that inflationary pressures remain strong, with inflation remaining elevated and recent data indicating it is broadly based.
Capacity pressures seem tighter than initially estimated, and there are indications that higher fuel prices are being passed on to other goods and services. The RBA expects inflation to stay above 3% for the coming year and warns of a growing risk that higher inflation expectations may become entrenched.
Additionally, AI-related investment is driving rapid growth in prices for technology-related goods, and inflation in many goods and services remains high. The RBA believes that cost pressures are affecting many firms, with some either increasing their prices or considering further increases. The unemployment rate is also projected to rise further, with employment growing but the unemployment rate projected to increase more than anticipated in the August forecasts.
The RBA indicated they would continue to monitor the data closely. The rate hike will result in variable owner-occupier mortgage rates increasing to approximately 6.75%. An average $736,000 new loan would see monthly mortgage repayments rise to $4,774, a $1,904 (66%) increase from their pandemic low. This equates to an additional $595 per month or around $7,140 annually, based on the cumulative impact of the RBA's five interest rate hikes this year.
The Australian Financial Review highlights that, if the RBA's latest hike occurs, mortgage repayments on a median-priced home would consume 37.4% of a typical household's income, nearing the record level reached in 1989. Back then, mortgage repayments accounted for 37.5% of household income due to mortgage rates around 17%. Consequently, Australian mortgage holders are facing a challenging holiday season, with potentially worsening financial conditions expected in early 2027.
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