Is the Reserve Bank of Australia really going to hike by 0.75%?

A triple cash rate hike of 0.75% by the Reserve Bank of Australia may be on the horizon for Australians, according to one major bank. But what is this prediction based on? And what is the likelihood we’ll actually see this materialise?

The suggestion of a 0.75% cash rate hike next month comes courtesy of Deutsche Bank. Chief economist for Australia, Phil O’Donaghoe, said: “We continue to look for the cash rate to rise by 75 basis points in August, and for the cash rate to reach 3.1 per cent by the end of the year”.

This prediction is at odds with forecasting from the big four banks for August, and previous statements from the RBA Governor Philip Lowe. However, we should not discount the basis for the 75-basis point hike suggestion.

The Australian Bureau of Statistics released the latest employment figures for June, which show that the unemployment rate has decreased by 40 basis points to 3.5%. This is the lowest rate of joblessness since 1974, and much lower than the previously predicted fall from 3.9% to 3.8%.

These figures have some experts nervous about new inflation pressures, recommending that protecting the Australian economy from out-of-control inflation is the top priority come the August meeting on monetary policy.

So, why are experts suggesting a cash rate hike of 0.75% and what impact could that actually have on your home loan repayments?

Who thinks the cash rate could hike by 0.75%?

Tumbling unemployment rates mean there are fewer workers seeking employment. When this occurs, employers generally increase wage rates to draw in new staff.

The theory of wage-push inflation notes that higher wages could result in businesses further raising the cost of goods, leading to greater inflationary pressures.

The latest prediction from the Reserve Bank of Australia (RBA) Governor Philip Lowe is that inflation may climb to 7% by the end of the year. With the latest cash rate hikes occurring as a result of inflation, a lower unemployment rate may push the Reserve Bank’s hand to hike even higher come its August meeting

Deutsche Bank chief economist for Australia, Phil O’Donaghoe, has pointed to several key reasons that the RBA may lift rates by 0.75 percentage points at its next meeting.

Mr O’Donaghoe has suggested that inflation and demand in the economy is still high, and that there is a “risk” that Australians could become accustomed to increasing prices. He went further to state that household sensitivity to rate rises was “overstated”, with preventing inflation from rising out of control the priority of the RBA.

However, this prediction is not in line with forecasts from economists at the big four banks. Today, Westpac came out reaffirming its stance that a 50-basis point hike is expected in August. It now expects that a pause in the interest rate hike cycle is "unlikely" in September, with a 25-basis point increase tipped. Instead of a 75-basis point hike in one month, the hike would be spread out across the next two months. 

Further, some experts have suggested that the pressure wage rises could place on inflation may not be as influential in Australia, as wages not having kept pace with inflation and productivity growth over the last three years.

Greg Jericho, Policy Director at The Australian Institute, and columnist at The Guardian Australia, noted in a May article that “the evidence is clear that wages did not cause the current surge in inflation”, referencing the annual inflation spike of 5.1% in the March 2022 quarter.

“From June 2019 to the end of 2021 inflation has increased 5.7% and productivity has grown by 4.5%. And yet rather than wages growth being equal to the sum of those two measures, nominal wages in that period increased just 4.8%, and real wages have fallen 0.8%. Real wages have thus declined, while real labour productivity increased.”

“….There is no reason to believe that suppressing wages will cause inflation to moderate. Asking workers to accept a permanent reduction in their real living standards to fight inflation that they did not cause is neither fair nor economically sensible,” he writes.

While this article was written prior to the latest unemployment figures, it’s worth noting that unemployment has been on the decline for some time, now 1.7 percentage points lower than the start of the pandemic, March 2020.

But what does the Reserve Bank think? At a recent Q&A, Governor Philip Lowe did state that a 75-basis point hike was not something they had previously considered.

When questioned about the possibility of a 75-basis point hike in June, Mr Lowe said: “I don't see it as taking 75 basis points off the table, because it was never on the table”.

“I don't want to forecast the next meeting, but I suspect it'll be the same discussion again, 25 or 50 [basis points] again,” he said.

The real impact of a 0.75% rate hike

However, RateCity research shows that on a 25-year $500,000 mortgage, the difference in monthly payments from April to August would be a hike of $543. This is based on the RBA’s average existing customer rate of 2.86% in April, factoring in a total rate hike of 2%.

For an everyday household, they may not see an extra $543 a month in mortgage repayments as an “overstated” increase to their budget. This is the equivalent of paying one extra utility bill or a new set of tyres each month.

Impact of 0.75% cash rate hike on $500,000 loan

Source: RateCity.com.au

Note: Based on $500,000 home loan with 25-years remaining, at RBA average existing customer home loan rate of 2.86% in April 2022. Figures based on cash rate hikes of 0.25% in May, 0.50% in June and July, and the predicted 0.75% hike in August. Results do not factor in fees.

With only weeks left until the next Reserve Bank of Australia meeting to set the cash rate, time will tell if the 0.75% rate hike prediction comes true. In the meantime, it’s a stark reminder for homeowners to not bury their head in the sand when it comes to interest rate rises.

The cash rate is predicted to continue to rise in 2022, and potentially into 2023. If you’re a mortgage borrower looking for interest rate relief, you may need to give yourself a rate cut. Consider reaching out to your lender and asking for a rate cut. Lenders typically offer new customers lower rates to entice them to join, so request that they match this rate

And if your home loan offers features like the ability to make extra repayments or an offset account, it may be worth considering using these features to lower your principal or your interest charges.

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