Cash rate pause now a live option, but 0.25% hike most likely on Tuesday

The Reserve Bank is likely to be weighing up whether to raise the cash rate by another 0.25 percentage points next week, or hit pause in December, following today’s drop in annual inflation figures.

While the Board has floated the idea of leaving rates unchanged for an interval, given its commitment to returning inflation to the 2 to 3 per cent band, the most likely outcome is a 0.25 percentage point hike on Tuesday.

If this happens, it would take the cash rate to 3.10 per cent – the highest rate in a decade.

RateCity.com.au analysis shows another 0.25 percentage point rise would mean the average borrower with a $500,000 loan before the hikes started in May could soon be paying a total of $834 more a month.

0.25% HIKE IN DECEMBER: Increase in monthly repayments

Source: RateCity.com.au. Based on an owner-occupier paying principal and interest with 25 years remaining. Starting rate is the RBA av. existing owner-occupier variable rate of 2.86% in April and assumes banks pass the hikes on in full.

All four big bank economic teams expect the RBA will hike by 0.25 percentage points at Tuesday’s meeting, however, the peak of the cash rate still remains a contentious issue:

RateCity.com.au research director, Sally Tindall, said: “The possibility of a pause has become a live option for the RBA this Tuesday on the back of these latest inflation figures.”

“That said, it’s unlikely the RBA will take its foot off the accelerator entirely next week. The Board has said repeatedly it is prepared to do what it takes to get inflation back under control – one drop doesn’t mean ‘job done’,” she said.

“This month’s inflation figures recorded a drop but we’re still a long way from the target band of 2 to 3 per cent. With wages moving in the right direction and unemployment dropping back down to 3.4 per cent, the RBA has cover to fire off one last rate hike for the year.

“If this happens, the average borrower with a $500,000 debt at the start of the hikes could be looking at a total increase in their monthly repayments of $834. That’s like booking return flights to Bali every month, but never leaving your living room.

“The silly season is going to be a more serious one for a lot of families facing another cash rate hike before Christmas, at the same time inflation is set to peak.

“If you’ve got a home loan, take the summer break to work on your budget and look for ways to make cutbacks. Consider refinancing the mortgage to a more competitive interest rate – it’s one of the biggest monthly expenses but also one of the best ways to save,” she said.

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