RBA tightens the mortgage screws, hiking rates to an 18-year high

In the rates that stopped the nation, the Reserve Bank of Australia (RBA) today raised the official cash rate (OCR) to an 18-year high of 4.85%.

The decision was widely anticipated by economists and financial markets. However, there was some dissent within the RBA, with six board members voting for the hike and three against.

In its media release accompanying today’s decision, the RBA noted that inflationary pressures remain entrenched:

Inflation remains elevated and recent data indicate that it is broadly based…Capacity pressures appear a little tighter than previously estimated and there are indications that higher fuel prices are being passed through to prices of other goods and services. Inflation is now expected to remain above 3 per cent for the coming year and there is an increasing risk that higher inflation expectations will become embedded…

AI-related investment is driving rapid growth in prices for technology-related goods, and inflation in many goods and services remains high. Liaison indicates that many firms are experiencing cost pressures and are either increasing the prices of their goods and services in response or looking to do so…

Given the revised inflation outlook and the continuing upside risks, the Board judged that a further tightening in financial conditions is warranted to support the return of inflation to target.

The RBA also expects the unemployment rate to rise further:

Employment is expected to continue to grow, but the unemployment rate is projected to rise by more than expected in the August forecasts.

The RBA gave little forward guidance beyond saying it would remain attentive to the data.

Today’s rate hike will see variable owner-occupier mortgage rates climb to around 6.75%.

The following table shows the change in minimum monthly mortgage repayments on an average $736,000 new loan, based on the change in rates from the pandemic low to now, as well as what repayments would look like after today’s hike:

Monthly mortgage payments would rise to $4,774, up $1,904 (66%) from their pandemic low.

In fact, the five interest rate hikes the RBA delivered this year would raise mortgage repayments by $595 a month, or around $7,140 annually.

As illustrated below by the Australian Financial Review, mortgage repayments on a median-priced home would consume 37.4% of a typical household’s income if the RBA hikes on Tuesday:

This approaches the record burden reached in 1989, when mortgage repayments absorbed 37.5% of household income amid mortgage rates of around 17%.

Thus, Australian mortgage holders are facing a grim Christmas, with potentially worse to come in early 2027.