RBA lifts March interest rates by 0.25%, marking an 11-year high

Market Insights
1 year ago
3 minutes

The Reserve Bank of Australia (RBA) has announced an interest rate rise of 25 basis points following their board meeting today, bringing the cash rate to 3.60%.

This marks the tenth consecutive rate rise, bringing the official cash rate to an 11-year high.

In a statement following the announcement, RBA Governor Philip Lowe stated, “Global inflation remains very high.

“In headline terms it is moderating, although services price inflation remains elevated in many economies. It will be some time before inflation is back to target rates.”

In the minutes of its February 2023 meeting, the RBA had considered two options for the cash rate - a 25-point hike or a 50-point hike. The smaller point rise was selected, in part due to uncertainty around tighter household budgets and falling real incomes.

As a result, the average borrower with a 25-year, $500,000 loan at the start of the hikes in May 2022 could soon be paying a total of $908 more monthly on their mortgage.

Dr Lowe recognises the effects of these interest rate hikes on the housing market, saying in his statement 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.”

Economists from Australia’s major banks have predicted this cash rate rise, and most expect that we won’t see an easing until the end of 2023 or early 2024.

“The speed and magnitude of the tightening so far, combined with ongoing delayed pass through and uncertainty over how consumers react (with confidence already very low), poses the risk of a sharper than expected slowdown,” said NAB.

“We still don’t expect a technical recession in Australia - but with rates rising above 4%, it is becoming more of a possibility. Ultimately, a more significant downturn would see rates cut more quickly in early 2024.”

Commonwealth Bank remains the optimist of Australia’s big four banks, predicting two further rate hikes in March and April 2023 and a policy easing at the end of 2023.

“We think that the RBA is underestimating the lagged impact that the already delivered interest rate hikes will have on the economy in 2023,” Commonwealth Bank said.

Overall, the RBA board members agreed that further increases to the cash rate would likely be needed.

“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” Dr Lowe explained in his statement.

“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

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