Interest rates, Reserve Bank: Rates reprieve, but borrowers still face ‘painful squeeze’

Household borrowers are set to receive much needed reprieve from further rate pain when the Reserve Bank board convenes for its final meeting of 2023, but reprieve could be short lived.

Ahead of the decision to be handed down at 2:30pm Tuesday, money markets were pricing near-zero odds of a rate hike after the RBA tightened the screws on mortgagors at its last meeting.

At the start of November, the chance of a December 5 hike was at approximately 10 per cent.

Similarly, economists have forecast the central bank will hold the cash rate steady at 4.35 per cent, with all major banks now forecasting a hold.

The RBA is currently battling to return inflation – currently running at 4.9 per cent – back to its 2 to 3 per cent target band. By raising interest rates, the central bank increases the cost of borrowing, deterring spending and slowing economic activity.

In its crusade to crush price growth, the RBA has hiked interest rates 13 times since May last year, hiking interest rates from a record low of 0.1 per cent to their current level of 4.35 per cent.

Speaking ahead of the board meeting, AMP chief economist Shane Oliver said recent data flows showed there was “no smoking gun” to justify another rate hike on Tuesday, however further tightening could not be ruled out.

“Since the last meeting we have seen a slight rise in unemployment, softer retail sales, lower than expected inflation and a slowing in national home price growth with some cities seeing price falls,” Dr Oliver said.

“That said the risk of another rate hike – which would most likely be at the next meeting in February if it occurs – remains high at around 40 per cent.”

Recent comments from RBA governor Michele Bullock “lacked the sense of urgency” to hike in December when compared with comments made prior to the November meeting when the the cash rate was bolstered by 25 basis points, Dr Oliver added.

Gareth Aird, Commonwealth Bank’s head of Australian economics, also tipped a rate hold noting that any move to increase rates again would be dependent on incoming data the central bank received.

“Any further tightening will require the economic data, particularly on the prices side of the economy, to print stronger than the RBA is anticipating,” Mr Aird said.

Mr Aird added that fresh GDP data, which CBA forecast would grow by 0.4 per cent, would be closely watched by the RBA and economists to determine how the economy was faring as the RBA attempted to bring inflationary pressures to a heel.

As the RBA has conceded, households are facing a “painful squeeze” as the central bank has ratcheted up rates.

Borrowers paying a an average-sized variable rate loan of $585,000 are already paying more than $1500 extra every month than they were before the RBA started its current tightening cycle, according to loan comparison website Compare the Market.

Another hike would add a further $96 to average monthly repayments.

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