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ABC News
ABC News
Business
business reporter Michael Janda

Reserve Bank slows the pace of interest rate rises with 0.25 percentage point increase

The Reserve Bank has elected to slow the breakneck pace of interest rate rises, with the sixth straight hike being 0.25 of a percentage point instead of the widely expected 0.5.

It is the first time since the RBA's initial hike in May that rates have risen less than 0.5 of a percentage point.

RBA governor Philip Lowe said the bank's board decided it was time to slow down a little and take stock.

"The cash rate has been increased substantially in a short period of time," he noted in his post-meeting statement.

"Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia."

The move takes the benchmark rate to 2.6 per cent, although that is still the highest official interest rate in Australia since July 2013.

National Australia Bank was the first of the major banks to announce it was passing on the rate increase in full to variable loan customers, effective from October 14.

Westpac followed shortly after with a 0.25 of a percentage point increase taking effect from October 18.

So far, the major banks have passed on rate hikes to their customers in lock-step with the RBA, although new borrowers have on average been receiving lower mortgage rates than existing customers.

More rate rises expected

The increase will add $74 a month to repayments on a 25-year $500,000 mortgage, and double that for borrowers with a million dollar home loan.

Repayments on a half a million dollar 25-year loan have now risen by $687 a month since the first rate hike in May, assuming all the rate rises are passed through in full.

However, any borrowers hoping that the smaller rate rise would signal an end to increases are likely to be disappointed.

"The board expects to increase interest rates further over the period ahead," Mr Lowe emphasised.

"The size and timing of future interest rate increases will continue to be determined by the incoming data and the board's assessment of the outlook for inflation and the labour market.

"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."

The Commonwealth Bank's head of Australian economics Gareth Aird was one of the few analysts tipping a smaller rate rise on Tuesday, and he expects only one more ahead next month.

"We expect a further 25-basis-point rate rise at the November board meeting," he noted after Tuesday's decision.

"From that point our central scenario has the RBA on hold as they the give themselves time to assess the lagged impact of rate rises on the Australian economy .

"The risk to our call sits with a further 25-basis-point rate rise at the December board meeting, which would take the cash rate to 3.10 per cent."

BetaShares chief economist David Bassanese said Australia was likely to keep falling behind the rapid rise of interest rates in the US, which are already 3-3.25 per cent and expected to rise another 0.75 of a percentage point early next month.

"Given around 80 per cent of local homes loans are variable rather than fixed (compared to only 15 per cent variable in the United States), our economy is arguably also more sensitive to short-term interest rates — suggesting the RBA needs to be relatively more careful in deciding how quickly to raise rates," he said.

Westpac is forecasting the highest interest rate peak of the major banks, at 3.6 per cent by February, which financial comparison firm Canstar said would see repayments on a 30-year $500,000 loan go up more than $1,000 a month in less than a year.

RBA lifts cash rate by 0.25 of a percentage point
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