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The central bank has revealed the second cash rate hike for the year.
The Reserve Bank of Australia (RBA) has made its tenth consecutive cash rate hike, raising the official cash rate by 25 basis points (bps) to 3.60% from 3.35%.
The decision to raise the cash rate does not come as a surprise, as the major banks predicted a 25 pbs rise after adjusting their cash rate forecasts from 3.85% per cent to 4.10%.
Despite clear signs that the brakes are being slammed on the Australian economy, the RBA once again chose to increase the cash rate target.
This latest increase will take many borrowers – both personal and business – well past their lenders’ serviceability test [currently 3% over product rate] and will be a serious drag on both consumer and business sentiment.
The move to hike came despite “some easing” last month, and even though labour market conditions “remain tight, with the unemployment rate close to a multi-decade low.
The RBA’s recent minutes confirmed its determination to bring down inflation and avert a wage-price spiral.
Now the cash rate is sitting at 3.60% after 350 basis points of tightening to date, maximum borrowing capacities have dropped by around 30%.
The significant reduction in borrowing capacities implies further price falls.
The full impact of the last 9 months of rate increases will continue to compound the decline in building activity as lending indicators for housing activity fall to the lowest levels in 15 years.
Loans for the purchase and construction of a new home fell in January to the weakest month since November 2008. This is before the full impact of rate increases in 2022 hit the market, let alone the February 2023 increase.
By continuing to raise rates the RBA will inflict further unnecessary pain on the $120 bn housing sector and related industries.
The lead up to the March decision
The March rate forecasts were adjusted recently following RBA governor Phillip Lowe’s statement during last month’s minutes, where he notably changed the wording from the December statement.
While the governor stated in December “the board expects to increase rates further over the period ahead, but it is not on a pre-set course”, he changed it in February to “the board expects that further increases in interest rates will be needed over the months ahead”.
Additionally, it was revealed that the central bank had not considered a pause for the 7 February cash rate decision.
Influences stemming from wages, unemployment, services demand, supply chain issues and 33-year record high inflation informed this decision. Due to this, the RBA board agreed that “a further increase in interest rates was warranted”.
The RBA began upping the cash rate last May, where it rose by 25 bps before commencing with four consecutive 50-bps rises during June, July, August and September. The rate-hikes returned to 25 bps in October, November, December, and February.
More to come…
