The Reserve Bank has increased interest rates back-to-back for the first time in more than a decade with a swingeing 0.5 per cent rise, the biggest since 20212.
And some are predicting a cash rate to 1.35 per cent in July.
The Financial Review quoted Marcel Thieliant, senior Australia and New Zealand economist at Capital Economics, as warning investors should brace for another 50 basis point increase in July and August.
Mr Thieliant is expecting inflation to peak at seven per cent – pointing to more pain for consumers and home owners.
Reserve Bank governor Phillip Lowe surprised the markets and increased the official cash rate more than most economists expected. Mr Lowe announced the 0.50 basis points increase, taking the official cash rate to 0.85 per cent.
Last month, interest rates rose by 0.25 basis points.
AMP Chief Economist Shane Oliver spoke to the ABC and said the rates hike was needed to curb inflation. He expected a rate hike of 0.40 basis points and thinks the RBA went for a higher hike to curb inflationary pressures but wanted to strike the balance right so the economy didn’t suffer.
Dr Lowe said the rise needed to happen.
“While inflation is lower than in most other advanced economies, it is higher than earlier expected…Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.
“As the global supply-side problems are resolved, and commodity prices stabilise, even if at a high level, inflation is expected to moderate.”
The hike is likely to lead to mortgage holders reviewing their finances.
Home Loan Experts CEO Alan Hemmings said: “For anyone who has taken out a new mortgage over the last ten years, this is the first time they have experienced a cycle of rising interest rates.
“The first thing is not to panic. They need to remember when they were originally assessed for the home loan, the lender will have used an interest rate of 5% or more, which means their repayments should still be within a range they can afford.
“The next step is to look at what their interest rate moves to with their existing lender and see if there are better offers in the market.”
Lendi Group CEO Dave Hyman said: “During the week of the RBA announcement, we saw a 32% increase in the total number of home loan enquires on the Lendi platform1, as compared to the four weeks leading up to the rate rise.
“Additionally, in the 24 hours leading up to when the cash rate announcement was made, we saw an increase of over 113% in the number of refinancing enquires on the Lendi platform from May 2 compared to May 3. The increase in enquiries indicates that savvy Australians are starting to consider their refinancing journey sooner rather than later.
To help ease the pain, Commonwealth Bank is amongst the lenders to try and entice customers with bonus offers. They are giving customers three years of free internet for eligible homeowners. The offer is designed to help customers cope with rising living costs and is expected to save customers at least $2,700 over three years.
Existing home loan customers can save 30 per cent off More NBN plans for 12 months if they sign up using their Commbank credit or debit card.
The bank’s executive general manager of home buying, Dr Michael Baumann, said: “We know that the rising cost of living is being felt by all Australians, particularly those looking to purchase a property in the current environment. We want to support pre-approved home loan customers where we can and that includes longer-term savings on essential and ongoing bills and commitments like the internet.”
In addition to saving on internet plans, the banks are also expanding cashback offers and other rewards to attract customers who are coming off fixed-term mortgages or searching for a better deal.
Commbank is also offering a green home loan which will give customers discounts for building highly energy-efficient homes.
Despite the major banks offering incentives for signing up to a mortgage with them, home loan approvals fell in April according to data from Morgan Stanley.
Morgan Stanley banking analyst Richard Wiles spoke to the Financial Review and said: “Overall, falling loan approvals are consistent with an environment of weakening housing demand, prices and turnover.
“However the extent of the decline was somewhat surprising and suggests that a faster softening may be likely in coming months, especially when RBA rate increases and falling national house prices are factored in.”
He concluded by saying that he expects national house prices to decline by around 15 per cent over the next 18 months, retracing most of their post-COVID gain.