Industry reacts to May decision
The Reserve Bank of Australia has released its decision on the official cash rate, announcing a 25-basis point hike on Tuesday.
The interest rate on exchange settlement balances has increased by 25-basis points, to 3.75%.
The May rise takes the official cash rate to 3.85%, marking the third rise this year and the 11th rise since May 2022.
Ahead of the monetary policy decision, announced on Tuesday afternoon, NAB chief economist Alan Oster and ANZ senior economist Adelaide Timbrell told MPA that they expected the Reserve Bank to keep the official cash rate on hold. St.George Bank senior economist Jarek Kowcza said in an Economic Outlook on Monday that this was the view of 70% of economists surveyed by Bloomberg.
RBA Governor Philip Lowe said on Tuesday that the central bank had weighed up the rapid rise in the cash rate to-date and the delayed impact on borrowers, against the current elevated inflationary environment, with persisting inflationary pressures.
“Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range,” Lowe said. “Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.”
Lowe said the RBA Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5% in 2023 and 3% in mid-2025,” he said.
Lowe said the Board’s priority remained to return inflation to target.
"High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment."
The May decision follows a pause in April after 3 ½ percentage points of official cash rate increases since May 2022. Current ABS figures show annual inflation receded to 7% in the March 2023 quarter, down from 7.8% in the year to December.
Bianca Patterson (pictured above), director of Perth brokerage Calculated Lending described the RBA’s decision to hike the cash rate as “disappointing”, but not entirely unexpected.
She pointed out that the 375 basis points of increases since May were aimed at reining in inflation and spending, with less consideration given to borrower impacts.
“The RBA have been making consecutive bold calls considering spending and inflation numbers, while at the same time noting that there are 1.92 million fixed rate loan facilities due to mature between 2022 and 2024,” Patterson said.
As interest rate rises were aimed at cooling inflation, Patterson said it was unclear whether the RBA had given full consideration to the anticipated reduction in spending among fixed rate borrowers once their loans roll over.
Many borrowers did not fully appreciate that their loans were maturing to a rate of around double, or in some cases, triple what they had paid over the last few years, she said.
“The RBA’s higher-level review of the economy seems to have overlooked how detrimental 11 consecutive rates rises could be when coupled with APRA’s 3% servicing buffer,” Patterson said.
“That has led to unintended consequences where borrowers who took out a loan two years ago no longer qualify to refinance to a better rate, despite having no change in circumstances and the ability to demonstrate they are making repayments on time.”
Irrespective of whether interest rates were rising or falling, Patterson said Calculated Lending had detailed conversations with clients to ensure they understood the long-term commitment of a home loan, and that interest rates would change over that time.
“We educate them to use the lower rates and minimum repayments as an opportunity to save more to offset or pay down their loans, while at the same time preparing them for the rates rises that will inevitably come,” Patterson said.
Pepper Money CEO Mario Rehayem (pictured above left) said that he was disappointed the Reserve Bank had not allowed more time to assess the real impact of the rises put through to date, noting that it would place further pressure on everyday mortgage holders.
“I appreciate that the task at hand for the RBA is a difficult one, but my view is there has been more than enough rate hikes carried out to curb spending for mortgage holders,” Rehayem said.
Rehayem said it was important that borrowers take a close look at their discretionary spending and empower themselves by managing their finances.
“While the 11th rate rise is likely to represent pain for some, there continues to be evidence to suggest that most households are well-placed to navigate the financial challenges associated with higher prices and interest rates – especially if employment remains resilient,” Rehayem said. “House prices are also showing signs of resilience with pockets of growth, in part due to increased population.”
Mortgage Choice CEO Anthony Waldron (pictured above second from right) said the decision to raise the official cash rate was likely to have been driven by inflation, which eased over the March quarter, but remained significantly higher than the RBA’s target.
“The RBA’s decision will likely be met with disappointment by the nation’s borrowers after the Bank’s April decision to pause its recent run of cash rate hikes,” Waldron said.
Helping borrowers to bridge the gap
Patterson confirmed that Calculated Lending had been proactively contacting clients ahead of their fixed rate loan expiry date.
Mortgage clients are informed of what their repayments will look like at current interest rates and are encouraged to build a savings buffer of the difference between their current and future repayments, she said.
“We are having countless conversations about budgets every day, and this is becoming especially prevalent with our customers on fixed rates,” Patterson said.
“We suggest they go over their spending over the last six months to see where their money has been going, where they can cut back, and if there are areas they may be able to revisit with a specialist, e.g. their insurances.”
Rehayem suggested that brokers continue to stay in touch with their clients and ensure they had access to the best loan products and options currently available.
“Taking extra time to show a customer all their loan options could put more money back in their pocket, help them get the best option for their circumstances, or it could even be the difference between getting an approval instead of delivering a ‘computer says no’ outcome,” Rehayem said.
Against the backdrop of 11 rate rises, brokers can continue to play a meaningful and influential role, he said. “By simply asking customers questions about their expenses, it can prompt them to take stock of their spending habits and identify other opportunities like debt consolidation,” Rehayem said.
Resimac chief financial officer Jason Azzopardi (pictured above far right) said the decision to lift the cash rate was not unexpected given the wage, inflation and unemployment data, and the RBA’s stated determination to tame inflation.
"For customers with existing home loans, this increase will remove any sense of security last month’s pause signalled, and we expect customers to continue to tighten their belts," Azzopardi said.
Resimac expected lending to self-employed and credit-impaired borrowers would continue to perform well. The non-bank lender provided flexible, competitive products to serve these borrowers, and its expert BDM team helped brokers realise the benefits and take advantage of this market, Azzopardi said.
Waldron said that the rising interest rate environment had cemented demand for well-priced variable rate products this year, noting that most borrowers opted for a variable rate.
“Mortgage Choice home loan application data shows that in April, 95% of borrowers chose variable rate home loans, compared to just 5% who fixed their rate,” Waldron said.
Using a client’s income after tax as a start point, Patterson said that fixed expenses were deducted first. Surplus funds are then split between savings for future one-off expenses (emergency savings) and the rest is marked for entertainment and discretionary spending.
“For most clients, the quickest wins are cutting out buying coffee and lunch at work, catching public transport to work, reducing streaming services down to one or two, cancelling uber eats and cooking more meals at home,” Patterson said.
Noting that Tuesday’s announcement put rate cuts out of the picture in the near term, Rehayem said the mortgage and finance industry could expect to see many borrowers’ needs evolve.
“As a result, demand for near prime and specialist lending options will grow – more so than ever,” he said.
