RBA lifts cash rate to 3.35pc at February board meeting

The Reserve Bank of Australia has lifted the official cash rate by 25 basis points following its first meeting of 2023, taking rates to their highest level since 2012 and flagging that further rises are likely in the months ahead. 

Announcing the decision, RBA Governor Philip Lowe said that stubbornly high inflation rates were a key motivation for the cash rate increase. 

“In Australia, CPI (consumer price index) inflation over the year to the December quarter was 7.8 per cent, the highest since 1990,” he said. 

“In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.”

Dr Lowe said that while inflation was forecast to decline in 2023, it was “important that this remains the case”. 

“The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” he said. 

Dr Lowe acknowledged that the RBA’s cash rate rises had already caused pain for some households. 

“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices,” he said. 

He said that there was some uncertainty about when household spending would slow. 

“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” he said. 

Despite this, Dr Lowe flagged the strong possibility of further cash rate rises to come in the months ahead. 

“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,” he said. 

“In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” 

Geoff Lucas – The Agency

Chief Executive Officer and Managing Director of The Agency, Geoff Lucas said today’s 25 basis point cash rate rise was expected and he tipped another could be on the cards in March.

“Due to recent economic data, and specifically US wages data, it’s possible we may see a further interest rate rise of 25 basis points at the March RBA board meeting before a period of stability,” he said.

“As it takes two to three months for rate rises to work their way into borrowers’ pockets, such a move would be fully impacting borrowers by May 2023. 

“This will combine with almost 25 per cent of borrowers coming off fixed rates of circa two per cent onto rates of circa six per cent between June and December 2023.”

Mr Lucas said buyers had just gone through the greatest rate of interest rate increases many had ever seen and this had created uncertainty and a reluctance to buy and sell.

But he said that market uncertainty was winding back as borrowers could see the RBA terminal rate approaching.

 “There is material friction in the Australian residential marketplace, two of these friction points in particular are interest rate uncertainty and stamp duty,” Mr Lucas said.

“Friction retards the natural ability of Australian families moving homes as their requirements change.

“The removal of interest rate uncertainty reduces the marketplace friction to some degree and we believe this will lead to a greater propensity to transact in the second quarter of the 2023 calendar year (from April) – as consumers become more comfortable about what the future looks like and they can price in that change.”  

Mr Lucas said national price reductions of between four and six per cent were expected in 2023, with most falls in the next six to nine months. 

“Those initial falls will be followed by a stabilisation in the market, which will be aided by immigration most notably from China and consequently a more robust last quarter,” he said.   

Looking at individual markets:  

Brisbane is experiencing the greatest rate of house price reduction in the country right now and it is poised for a stronger recovery due to the relatively low cost of living and migration patterns. It is underpinned in the medium to long-term by the 2032 Olympic Games. We believe these factors demonstrate strong value in the Brisbane and broader South East Queensland market.   

Melbourne is, in the long-term, tipped to be the most populous Australian city. Its rate of appreciation over the past five years has been significantly less than its competitor, Sydney, and we believe it therefore represents strong medium-term value. We therefore expect to see a stronger than normal recovery when the recovery comes.   

Perth has remained very robust and we expect to see that market remain steady and growth to match the broader Australian market, subject however, to vagaries in the mining sector.   

Manos Findikakis – Agents’Agency

Agents’Agency CEO Manos Findikakis said in recent weeks there had been an uptick in sales volumes and he didn’t expect today’s cash rate decision would alter that trend.

“I definitely think this 0.25 per cent is going to continue that trend,” he said.

“There’s already talk about interest rates dropping at the end of the year.”

Mr Findikakis said the current property market was still in buyers’ favour but vendors were aware the bottom of the market was approaching.

“We’re probably at the bottom,” he said.

“There may be a few percentage points to drop a little bit more, because I think there’s going to be an influx of stock and a few people refinancing.”

Mr Findikakis said agents in his group were also speaking to a lot of investors with multiple properties who were looking to sell one.

“There’s a lot of talk in that space from investors,” he said.

“Those people that’ve got two or more properties are looking at offloading at least one, to be mindful of cash flow because they don’t expect rental growth to increase any further.”

Mr Findikakis said there were still many positive factors in the property market and there would not be a huge crash.

“There’s been a correction and I think that’s all that we can look at it as,” he said. 

Mike McCarthy – Barry Plant Group

Barry Plant Group Chief Executive Officer Mike McCarthy said while it was inevitable there would be a rate rise today, it was “pleasing” the RBA had not opted for a double-whammy 50 basis point increase. 

“I think given the recent two inflation numbers, there’s no surprise whatsoever with today’s announcement,” he said. 

“I think probably the one pleasing element is that it’s only 0.25, because there was a lot of speculation that the Reserve Bank may have gone harder –  I think that would have been bad news for many homeowners who are already struggling to make their mortgage repayments, who will find it increasingly difficult as rates continue to rise.” 

He said the impact of the latest rate rise would vary significantly between borrowers, with those who entered the market at its peak most affected. 

“You’ve got some people who are managing it quite comfortably, and obviously those on higher incomes and lower mortgages can manage to absorb that into their budgets, depending on their other commitments, of course,” he said. 

“For those who’ve come into the market recently, and bought on the basis of a 2.5 or 3 per cent variable factor in terms of their loan (at the time of application), that’s now putting them under real pressure. 

“So I think a further interest rate rise is going to mean that those who have now absorbed that 2.5 or 3 per cent buffer when they originally borrowed, they’re going to find it increasingly difficult. And I think we’re going to see some pain in the market out there around that.”

He urged the RBA board to assess how rates were affecting this borrower group before making its next decision. 

“I think they certainly need to take that into account before the next interest rate because the impact of the interest rate rises does take some time to flow through,” he said. 

“My concern is that they were far too slow to raise rates initially, when business could see what was happening in the labour market, in terms of the pressures that were coming. 

“And my concern now is that they may potentially go too far… So I think we move forward with some caution, but obviously, we’ve got to get inflation under control – we can’t let it run around the best part of 8 per cent indefinitely.”

He said that the series of rate hikes that occurred in 2022 were already having a material impact on the property market. 

“For every potential borrower, it means that their budget, and their ability to borrow, is now decreasing,’ he said. 

“Unless their salaries increase, or their source of deposit increases, their borrowing capacity decreases. 

“So that certainly has a material impact on just about everyone in the marketplace out there, and for those who are borrowing at or near their limit, it does mean that they may have to reduce their budget.

“It means buying property that’s different to what they originally envisaged and maybe looking at apartments or townhouses rather than a standalone house, if that’s what we’re looking at, or potentially buying into more affordable suburbs than those that might have been a few months ago.”

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks said that while the 0.25 per cent increase to the cash rate was expected, Dr Lowe’s comments about future rises had caught some off-guard.

“Whilst there was no surprise that there was an increase, the statements made by the RBA Governor have caused the financial markets to predict that the rate rise process still has some way to go, with many economists now predicting that there may be a further two similar interest rate increases over the next few months,” he said.

He said that rate increases to date had had a clear impact on the property market.

“The rapid changes to interest rates over the last nine months have had two major impacts on the property market – the most obvious being the necessary reversal in property values to bring them back to be more in line with long-term value trendline, with the second impact being the significant decline in the volume of property transactions with many prospective vendors sitting on their hands while they wait to see what the RBA will do, and how this will impact of the value of their property,” he said.

He predicted that the market would continue to see some volatility as the RBA tried to balance taming inflation with avoiding too much economic pain.

As there is every likelihood that the RBA will overshoot and need to ease interest rates at some stage over the next 12 months or so, it’s likely that we’ll see higher levels of volatility throughout 2023.

T”he long line of increases is having an impact on the balance sheets of many Australians but the RBA has a lot more to focus on than just property prices and listing volumes,” Mr Cocks said.

“Governor Lowe stated today that the path to achieving a soft landing remains a narrow one but the sooner the RBA can get to its destination, the sooner it can get off the path.”

Mathew Tiller – LJ Hooker 

LJ Hooker Group’s Head of Research, Mathew Tiller said the RBA’s decision to lift interest rates for the ninth consecutive month was unlikely to surprise mortgage holders or flood the market with distressed listings.

He also said it was likely another 0.25 per cent rate will follow in March before CPI data is released in April. 

While many mortgage holders will be coming off low fixed-term rates in the coming months, it is not expected to have a major impact on stock levels.  

Mr Tiller said there may be a small rise of properties coming onto the market, however, strong employment figures will give people the confidence they will be able to make repayments. 

“Mortgage holders on low fixed loans have been saving for the past two years while everyone else has been paying higher rates, so it is likely they have a savings buffer,” Mr Tiller said. 

“People know higher interest rates have been coming and they would have been planning forward and budgeting rather than waiting until they cannot afford it. “

Mr Tiller said agents had reported strong numbers inspecting homes over January, with a shortage of stock keeping sales constant over the summer. 

A number of factors could have caused the spike in attendance at inspections over the holiday period, and auction volumes had also started to rise, with clearance rates of more than 60 per cent over the past few weeks. 

“It may also be people are window shopping in their area and looking at what prices are doing or if they are out there trying to pick the bottom of the market,” he said.

“The motivation will be to get in low and buy before anything changes towards the second half of the year when inflation has come under control.

“The good news for sellers is that listings are down for the start of the year which means there is not much competition out there between properties, and while prices are softening the pace of decline has slowed.”

Mr Tiller said while property prices had fallen it was important to remember they remain about 17 per cent higher than pre-Covid levels following unprecedented growth during 2021. 

“Looking at the performance of sale values or prices over a longer time period puts the current decline into perspective,” Mr Tiller said.

“It may be the quickest or sharpest decline on record but in 2021 we had the highest monthly growth on record. 

“Prices have fallen by 8.3 per cent from the peak of the market over eight months but that is off 25 per cent growth nationally, so there is a considerable way for them to fall to reach pre-Covid levels.”

Nerida Conisbee – Ray White 

Ray White Chief Economist Nerida Conisbee said today’s interest rate rise came as no surprise given the recent December inflation figures.

She said it had been a stressful 12 months for mortgage holders with average mortgage repayments increasing by $1000 a month since the start of 2022. 

“With less cash to spend on other things, this is now slowing down the economy and we saw this most clearly in retail trade figures released last week,” Ms Conisbee said.

“Unfortunately however, inflation is yet to slow and with it hitting a 30-year high of 7.8 per cent in December, it was no surprise that the Reserve Bank of Australia increased the cash rate by 0.25 per cent today.

“While this is unlikely to be the final rate rise, it is likely that the increases will stop soon as inflation comes down.”

Cameron Kusher – PropTrack 

PropTrack Director Economic Research Cameron Kusher said the cash rate now sat at its highest level since September 2012 and tipped it would rise again next month before pausing and potentially dropping towards the end of the year. 

He said the “fastest and most significant tightening cycle in many decades” would result in further property price falls.

 “With borrowing costs continuing to rise and the subsequent reduction in borrowing capacities, property price falls are likely to continue and accelerate in 2023, with the more expensive cities likely to see the largest price falls,” he said.

“Nationally, we are forecasting prices to fall by a further 7 per cent  to 10 per cent by the end of this year.

“This forecast is based on the assumption that the cash rate will see a total increase of 50 basis points from its December 2022 level (3.1 per cent). 

“With the RBA’s hike of 25 basis points today, we’re expecting an additional rate rise of 25 basis points, or thereabouts, likely to follow next month. 

“Thereafter, we expect rates to remain on hold, with the potential for them to be reduced in late 2023 or early 2024.

“We anticipate these further interest rates rises will push prices lower. However, a lower interest rate peak and earlier than expected interest rate cuts could ease price falls.”

Gavan Ord – CPA Australia 

CPA Australia Senior Manager Business Policy, Gavan Ord, said it was unlikely today’s cash rate rise would be the last in 2023.

“It’s going to be a tough year for some businesses and households,” he said.

Mr Ord said rising costs, higher interest rates, a skills shortage and economic uncertainty would continue, and he anticipates many businesses will “keep feeling the pinch”.

“Those on fixed incomes, coming off fixed interest rates or who have significant debts may face difficulty,” he said.

“A CPA Australia poll in December found almost half of 1200 respondents were most worried about rising costs this year. A third put a recession in 2023 as their top fear and one in five said higher interest rates was their biggest concern.”

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Jack Needham

Jack Needham was a Digital Editor at Elite Agent in 2022 & 2023

Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.