December interest rate announcement: RBA lifts cash rate by 25 basis points to 3.10 per cent

The Reserve Bank has lifted interest rates for a record eighth consecutive month, announcing the official cash rate will increase by another 25 basis points, from 2.85 per cent to 3.10 per cent.

Just weeks out from Christmas, it will come as unwelcome news to the millions of home owners across Australia who have endured the fastest tightening cycle in almost 30 years.

The cash rate has skyrocketed from 0.1 per cent in April to 3.10 per cent in December. Analysis from Domain Home Loans shows that, on a mortgage of $750,000, it’s the equivalent of an extra $1337 in monthly repayments. On a $1 million mortgage, homeowners are now having to find an extra $1783 a month.

Earlier last month there were hopes the Reserve Bank might possibly leave rates on hold for December. Despite October inflation figures coming in lower than expected, inflation is now expected to peak at 8 per cent by the end of the year – well above the RBA’s target range of 2 to 3 per cent – which ANZ senior economist Felicity Emmett says justifies another rate rise this month.

“That’s quite a scary peak,” she says. “I think that’s why the RBA were reluctant to pause at this point, especially given there’s a natural pause built in in January when they don’t meet.”.

Emmett says ANZ is still forecasting interest rates to hit 3.85 per cent by May next year, which would continue to put downward pressure on property prices.

“That’s another 100 basis points of increases that will flow through to people’s borrowing capacity and that will be the key driver of what happens with property prices,” she says.

“While we have had some sort of slowing in the pace of property declines in the past couple of months, I think it’s too early to think it’s over. We might get a more extended, longer period of weakness.

“It’s really hard to see prices going back into positive territory yet. It’s been a pretty wild ride over the past year in terms of inflation, house prices, interest rates … the whole lot.”

The rapid increase in interest rates since May has triggered a wave of refinancing as Australians on variable rates seek the best possible deal.

Domain Home Loans general manager Kareene Koh says this trend is expected to continue into 2023 as those who fixed their home loans at historically low rates approach their expiration date.

“Customers are responding in a variety of different ways,” she says. “Many are looking at refinancing to try and alleviate the pressure on the household budget. We have seen [buyers take] a more cautious approach to their purchase and take their time to see what happens with rates in the new year.

“With the wave of fixed-rate expiry in 2023, we will start to see the true impact of interest rate increases on consumer spending as more Australians tighten their belts to cover the step up in repayments over the last eight months. If the interest rate outlook from banks is correct, we are looking at a challenging time for at least another 12 months for mortgage holders.”

AMP Capital chief economist Shane Oliver agrees it’s unlikely that house prices have bottomed out already.

“I think if the Reserve Bank had kept rates on hold today, they’d have been worried people might party too quickly … that they might start to conclude the next rate would be a cut,” he says. “People are already saying house prices have reached the bottom but it’s too early for that.

“Yes, there’s been a slowing in the rate of house price declines. That’s occurred in several cities, particularly in Melbourne, Sydney – not Brisbane – and now some are predicting prices will rise next year. But if you go back through past cyclical downswings, it’s not always linear. There were periods where prices would accelerate and fall again, then go up again.”

For Oliver, the “fixed mortgage cliff” – a term used to describe the impending shock for mortgage holders who will revert from incredibly cheap fixed rates to the current (and much more expensive) interest rate – will likely have a further impact on prices next year.

“That could lead to another acceleration of the downturn,” he says. “Two-thirds of those with a fixed rate will see a reset next year and that flow-on of customers paying higher variable rates means the amount of money a new borrower can obtain to buy a house is substantially less than it was earlier this year.

“In some cases borrowing power is 25 per cent less. It’s hard to see property prices stop falling until interest rates start falling. We’re going to see swings and roundabouts. I don’t think the slump in property prices will stop until interest rates start falling.”

The rate hike forecast from the Commonwealth Bank had been, up until today’s rate rise, the most optimistic out of the big four banks – it had tipped today’s would be the last of the rate rises in this cycle.

But the tone of Reserve Bank governor Philip Lowe’s statement today did not show huge promise for a pause in February, and CBA this afternoon announced it had revised its forecast to include another 0.25 per cent rate rise when the RBA meets again in February.

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course,” the statement says. “It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Gareth Aird, head of Australian economics at CBA, says he expects February will now be when interest rates peak, adding that the housing market is unlikely to bottom out until interest rates stop rising.

“Today’s hike is consistent with the housing market softening into next year,” he says. “It’s once they pause the rate hikes, that’s when I think you’ll see the floor in the housing market.

“But it doesn’t stay like this forever and it can all turn around very quickly. If and when the RBA cuts rates, the [housing] market will change quickly.”

Aird says households are still yet to feel the full impact of this year’s rate rises.

“They haven’t actually been hit with all the hikes that have been delivered yet because there’s a lag between the announcement and the home borrowers experiencing the increase,” he says. “At CommBank that lag is three months.

“Adding into this next year are all the borrowers who will come off their fixed rates … the impact is already clearly on the housing market. The plan is to try and avoid a hard landing – in order to achieve that, you can’t keep taking rates up.”