RBA raises cash rate by 0.25%

The Reserve Bank of Australia (RBA) has today announced an increase to the cash rate of 0.25%, breaking the 12-year long period of declining or steady interest rates.

The cash rate now moves from 0.1% to 0.35%. The rise was slightly higher than expected, with many economists forecasting a rise of 0.15% and then a rise of 0.25% thereafter in June. The latter may still be in the realms of possibilities as the RBA stated it was time to withdraw the extraordinary monetary support provided to the Australian economy due to the pandemic. They went on to say: “This will require a further lift in interest rates over the period ahead.”

So why did the RBA raise rates? The RBA’s goal is to keep inflation between 2% and 3%, however, last week the inflation rate jumped to 5.1% – well outside this target range.  Many of the drivers of this inflation rate are considered external to Australia (the pandemic, war in Ukraine and China’s zero COVID policy), however, with inflation at its highest rate since 2001, the RBA felt it was better to move now.

What does this mean for mortgage holders? Well, it is expected that the banks will pass on the full amount of the increase to variable customers. For a mortgage of $500,000 this means repayments will increase around $100 per month.  Borrowers should prepare for this kind of increase each month over the next few months as it seems inevitable this will occur based on RBA comments.

And what about the real estate market? History shows the heat comes out of any real estate market when interest rates are rising. The past 12 months have seen some incredible price growth in our area so it should be no surprise to see some moderation in prices. However, history also shows our area does not usually see any dramatic decreases in prices during these times.

The impact on the election will no doubt create some comments from both sides, however, the reality is it probably won’t really make a difference to the outcome.

About the author

Ian Pepper has had a long and distinguished career as a finance and real estate professional. Originally trained as a Chartered Accountant in 1995, Ian worked in Sydney and London. He has an MBA from Macquarie Graduate School of Management and now sells real estate with Ray White Helensburgh. Ian also volunteers with local community groups including school P&Cs, sporting clubs and business chambers.