RBA shocks industry with rate rise

In a move that shocked the industry, the RBA has decided to hike the official interest rate to 1.75 per cent up from its 1.5 per cent record low.

The last time the cash rate moved was in August 2016, when it ticked down to 1.5 per cent; the last time it rose was seven years ago (November 2010), when it climbed to 4.75 per cent.

The rate increase did not come without some warnings. An online survey from ME showed that borrowers could face challenges if and when the RBA raises rates.

When 2,000 mortgage holders were asked how they would manage a rate rise of 1 per cent, 56 per cent said that it would have an “adverse impact”, while 43 per cent indicated that they would spend less and 27 per cent of investors responded that they would sell their investment property.

The survey also found that nearly 62 per cent of borrowers were expecting their lender to increase interest rates on their home loan in the next 12 months.

Echoing this expectation, the head of research at CoreLogic, Tim Lawless, said: “Considering the household savings ratio is at a five-year low of 4.6 per cent, and an increasing amount of debt is concentrated in residential mortgages, household balance sheets will be tested when interest rates eventually start to rise…

“It is highly likely that a lift in the cash rate would further dampen household consumption, potentially leading to slower economic growth and fewer new employment opportunities… if interest rates were to rise, it would likely suck demand out of the economy, with mortgagees spending a higher proportion of their income to service mortgage debt.”

The decision has shocked the industry. Prior to the announcement, none of the surveyed experts on the finder.com.au panel predicted a rate change, despite some economic indicators showing signs of improvements in economic conditions.

An analysis by RateCity noted that 21 out of 23 major economic indicators suggested that a change was not on the cards.

A HashChing survey of 531 brokers also reported that 95.73 per cent of the surveyed representatives were confident that rates would not change in either direction.

While most pundits did not predict today’s bank rate decision, some were expecting a rate rise in the near future.

Mortgage Choice’s head of corporate affairs, Jessica Darnbrough, touted the possibility of an upcoming rate rise, citing improved economic conditions as a motivation for a potential hike. 

“The domestic and international economies are starting to show signs of improvement, which could encourage the Reserve Bank to lift the cash rate at some point over the coming months,” Ms Darnbrough said.

Other industry experts predicted a possible rate cut in the near future.

Chief economist at ABC Bullion Jordan Eliseo predicted that these slowdowns would not be enough to influence the RBA to impose a rate cut.

Mr Eliseo said: “Despite concerns about a slowdown in retail sales growth over the last few months, the RBA still appears confident in the outlook for the Australian economy, though [its] rhetoric around tightening policy has changed appropriately.”

The chief economist added: “We still see the next move as down, but it will not come until Q1 2018 at the earliest.”