Borrowers are preparing to deal with higher costs for repayment in the coming months after the Australian Reserve Bank surprised a number of economists and speculators by raising the headline interest rate, the cash rate, this week. This is the first raise the headline interest rate has seen since May. The Reserve Bank decided to consider more than the regular figures for inflation for the quarter in September and decided to raise the key interest rate, the cash rate, from 4.5 per cent to 4.75 per cent.
The first bank to move in response to this was the Commonwealth Bank, which raised its basic rate for mortgages by 45 basis points. The current increase in mortgage rates is not expected to get on well with home owners. Meanwhile, the Australian dollar rose quickly in response and edged closer to parity with the United States dollar. Within seconds of the verdict from the Reserve Bank of Australia, the Australian dollar rose to the mark of 99.93 United States cents.
Michael Blythe, a chief economist with the Commonwealth Bank, commented on the recent cash rate hike, stating that they at Commonwealth knew that the rises in rates would soon appear. He added that the Reserve Bank must have decided that the risks of inflation to the Australian currency and economy were too great for them to avoid raising rates any longer.
This is not the first time that the Reserve Bank has moved in a way that surprised the financial markets. Last month, the majority of financial analysts and economists had expected the Reserve Bank to increase cash rates in order to prevent inflation from spiraling out of control while the Australian economy got back on its feet. When the inflation data from the most recent quarters became available and appeared to be solidly in range of where the Reserve Bank would target, investors, speculators, and economists posited that the bank would not change rates of interest for the sixth month in a row.
Now the rate focus has shifted to commercial banks as economists watch to see which of these banks, if any, decide to increase rates of borrowing in excess of the Reserve Bank’s 25 basis point shift. The Reserve Bank’s increase alone is projected to force home owners and borrowers to pay at least $46 more every month if they are repaying back the typical mortgage in Australia, which consists of a 25 year loan worth $300,000 before interest. A number of rate increases have transpired since October of last year, which have resulted in an average increase of monthly mortgages in excess of $300. Such increases do not factor in the changes that will occur from today’s interest rate hike.