The Reserve Bank has made a controversial decision to increase the cash rate again by 25 basis points to 4.10% in June, as it continues its hawkish fight to bring Australia’s inflation rate under control.
In what is its 12th increase to interest rates since May 2022, the RBA again noted that its resolute approach to increasing the cash rate was due to a need to curb inflation in the economy.
RBA governor Phillip Lowe said inflation in Australia had passed its peak, but at 7% was still too high.
“It will be some time yet before it is back in the target range,” Lowe said. “This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”
Mortgage broker Louisa Sanghera (pictured above left), founder of Zippy Financial, said the decision would significantly impact her clients.
“People have been really feeling the recent rate rises. I’d say two rate rises ago before today clients weren’t happy, but they were still coping. But the last few have really hit them,” Sanghera said.
“This decision today will hurt some clients. Clients have been talking to us about being stretched and we are just trying to encourage them to stop their discretionary spending. Our investors are being hit big time. With multiple properties they’ve got increases to multiple mortgages.”
Broker Jason Smith (pictured above right), director of Navigate Finance and Wealth in Townsville, agreed the further rate rise in June “would hurt quite a lot of people”, including owner occupier and investor borrowers.
“It will obviously flow through into higher repayments for customers,” Smith said. “Even if they want to refinance, they may be locked in where they are without being able to get the benefit of refinancing, because of the 3% serviceability buffer.”
Sanghera said rate rises were having a “big impact” on Zippy, with loan volumes down 24% this year.
“Even though we automatically reprice our clients every six months, this isn’t enough for most clients who are now wanting us to look at their rates every few months,” she said.
“We are spending a lot of our time on repricing mortgages. Then we have a lot of people asking us to refinance them, both existing and new clients. We are doing all the work on these deals but find that we cannot refinance them anywhere as they can’t service the debt on paper.”
Smith said that “people are worried but not struggling” in North Queensland.
“Loan sizes are significantly lower here than they might be in places like Sydney or Melbourne, but people still have 300K and 400K loans, which is still a lot of money for customers,” he said.
Smith said the RBA’s decision could mean a “lack of urgency” for people to follow through with borrowing.
“This may cause some people to continue to sit back as they decide what to do. Whether we still have one or two rate rises still to come, potentially the effect that this decision to increase rates will have is that it will cause more people to sit on their hands and do nothing.”
However some people will continue to pursue their plans regardless, Smith said.
“It’s probably about 50/50. There are still some people who will continue to go out and buy or build because that is their plan, even though it might end up costing them more in repayments.”
Smith said he believed the impact of previous rate rises over the last 12 months had yet to be fully reflected by the economic data, in areas such as reduced retail and discretionary spending.
“For example, me and my family right now are watching what we are doing,” he said.
Smith added that there were still a large cohort of people on cheaper fixed rate deals that were yet to feel the full pain of higher interest rates, and that would have a further impact in coming months.
Australia’s inflation rate rose to 6.8% in the12 months to April according to surprising monthly figures released by the Australian Bureau of Statistics in May, up from the 6.3% reported in March.
A recent Fair Work Commission decision to increase Australia’s national minimum wage by 8.6% and award worker wages by 5.75% was seized on by businesses as a potential further driver of inflation.