Economy

RBA interest rate forecast: Economists predict September 0.5 per cent rise

Aussie homeowners are set to be slugged by the fifth interest rate rise in a row, which could cost households an extra $1000 a month.

The Reserve Bank (RBA) is set to meet this afternoon for its September rates decision, with the Board widely expected to hike interest rates by another 50 basis points.

That would take the official cash rate from 1.85 per cent to 2.35 per cent – which would see the average repayment on a $800,000 mortgage soar to more than $4300 per month, an increase of $1000 from April, when the cash rate was just 0.1 per cent.

For the past four consecutive months, Australia’s central bank has increased the interest rate after a record low

Four of those hikes, in June, July and August, have been by a whopping 50 basis points.

If the RBA passes another 0.5 per cent increase for September — as most economists forecast — then that means Australia will be caught in the throes of its most rapid tightening cycle for more than two decades.

The RBA lowered the cash rate to 0.1 per cent at the end of 2020 amid the Covid-19 pandemic – the lowest it had ever been – and throughout the pandemic said they didn’t plan on raising the cash rates until 2024.

However, with inflation and cost of living on the rise, they hit mortgage holders with several rate rises. Australia’s cash rate currently sits at 1.85 per cent, up considerably

Ahead of the Tuesday afternoon announcement, AMP’s chief economist Shane Oliver told news.com.au that a 50 basis point increase is “the most likely scenario”.

“They’ve done five hikes in a row, four consecutive 0.5 per cent increases, it’s the fastest tightening cycle since 1994,” he said.

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Mr Oliver said that although 0.5 per cent was probably going to happen on Tuesday, some more conservative estimates put that figure a little lower which would provide welcome relief for millions of Australians.

“It’s possible they could slow down the pace, do a 0.25 or 0.4 per cent rise,” he said.

“0.4 per cent could take the cash rate back to a more normal.”

However, he added: “The more likely scenario is they stick to the 0.5 per cent (rise).

“The inflation numbers are still up.”

Australians with a $500,000 mortgage are paying on average an extra $475 per month compared to when interest rates were at their record lows.

It comes as Australia’s cost of living crisis is worsening, making borrowers even more cash-strapped than usual.

In the last quarter, transport costs rose 13.1 per cent as the price of fuel rose to record levels for the fourth quarter in a row.

Meanwhile, grocery shopping is also causing hip pocket pain, with Australians outraged to find lettuce heads selling for $10 a pop and capsicums marked at $15 for a kilo.

Mr Oliver said despite the cost of living crisis, economic data had not yet weakened, leaving the RBA with little choice but to keep trying to curb inflation with interest rate hikes.

“Economic data on retail and jobs has remained pretty strong,” he said.

He also pointed out there was usually a lag of several months for the economic data to reflect with interest rates.

Mr Oliver has predicted that the cash rate will peak at 2.6 per cent by the end of the year.

By next year, he thinks there will be several rate cuts after inflation is brought under control.

However, he warned that others believe the peak will hit 3.6 per cent in late 2023.

Interest rates in Australia reached an all time high of 17.5 per cent in January 1990. Since then, they have averaged 3.93 per cent.

Before this year, the last time the RBA hiked up rates was in 2010. It has only been going down ever since.

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