February interest rate announcement: Reserve Bank lifts cash rate by 25 basis points to 3.35 per cent

Key points:

• The RBA has lifted the cash rate target by 25 basis points to 3.35 per cent.
• This is the ninth time the official interest rate has been increased in this tightening cycle.
• Economists predict one or two more hikes, although some believe rates may be stabilising.

After one welcome month’s holiday from interest rate rises, the Reserve Bank of Australia (RBA) has voted to lift the cash rate for the ninth time in the recent round of hikes, to push it 25 points higher to 3.35 per cent.

It’s still unlikely to be the last hike of 2023, with RBA governor Philip Lowe foreshadowing further increases to the official interest rate this year to bring inflation back down.

“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” he said in a statement.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

The move will mean a $1 million mortgage will now cost a cumulative $1937 more in monthly repayments than when rates first started to lift in May last year, assuming banks pass on the rate rise in full as expected.

“At the moment, we have still not yet seen the full impact of these rises as there’s a large number of people coming off expired fixed rates over the next six to 12 months,” said Domain Home Loans chief executive Kareene Koh. “Now we’ve passed that 3 per cent buffer that many took their loan out on, we’re starting to get into riskier territory.”

“Given that wages haven’t gone up across the economy, it’s going to be a question of wait and see. Obviously, inflation is still very high which is why the rate rises are continuing to go up but retail spending data has shown a decline. So, we’re likely to see rates stabilise in the next three to 12 months as people start to tighten their belts.”

In line with other experts, Koh is predicting at least one or two more rate rises to come after this one in quick succession, with the rate to peak between May and September. That top rate could be as high as 3.85 per cent.

“But we’ll see it easing gradually in early 2024,” she said. “So, there should be some relief soon.”

Housing Industry Association chief economist Tim Reardon believes the RBA is wrong to have raised the rate yet again. He says there’s at least a six to 18-month lag between rate rises and the impact on the economy, so Reserve Bank bosses should have waited to assess the effect before lifting it further.

Although the annual rate of inflation hit 7.8 per cent on Australian Bureau of Statistics figures released on January 25, he points out that the quarterly percentage rate at December was 1.9 per cent, showing that it is slowing. 

“Also, there’s so much building work going on, that’s still stimulating the economy, so it’s not at risk,” he said. “On the other hand, the rate rises mean demand for housing, and the market, will be further dampened. The RBA has a big buffer because the economy has a lot of momentum, but we don’t want them to raise rates too high and risk the economy stalling.”

“Besides, a rise in interest rates has no impact on the price of many goods, like the cost of timber from Canada or building costs or transport fuel prices. They are subject to other drivers, like supply chain shortages. We need to normalise the cash rate, and have reliable economic policies, to provide stable conditions.”

In the meantime, the cash rate rise will only add to the pressures that mortgage-holders are already under, says Real Estate Institute of Australia NSW president Peter Matthews.

As well, like Reardon, he was hopeful there wouldn’t be an interest rate this month as the true impact of all the rate rises isn’t yet known. 

“The RBA is doing this on the bases of a lot of historical data and, even though there’s been a fair clearance rate at auctions this year, we’re getting a lot of buyers along, but only about a third are bidding,” he said. “They are cautious because, if there are more interest rate rises, they don’t want to over-pay or over-commit.

“With so many coming off the fixed rate this year, people are in a state of flux. A lot are under duress and the moment, and that’s not being properly recognised.”

On the other hand, around a third of people own their properties outright, so aren’t overly affected by interest rate changes, says Westpac chief economist Bill Evans. Another third rent so are often not directly impacted either, while the other third on mortgages most definitely are.

“But the first question is: will we get a recession, and we think not,” he said. “We think inflation in 2023 will slow down to around 3.7 per cent and a lot of the supply chain factors will come right. Then there’ll be scope for the rate to come down in 2024.”