RBA delivers sombre message to mortgage holders

The RBA this week delivered sombre news to anyone hoping for a pause in the interest rate tightening cycle this year.

With its February meeting decision to increase the cash rate by another 0.25 per cent, to 3.35 per cent, the Reserve Bank has picked up where it left off last year.

It also sent a clear message in the accompanying statement that its focus is absolutely on inflation, and that it expects to raise rates further in the months ahead.

Westpac economists see another two rate rises in the first half of this year, and then the RBA will go on hold. But for now, they've discouraged any expectation that rate rises are over.

The bottom line is that with inflation running at 8 per cent it's a long way above the RBA’s 2-3 per cent target band, and it’s going to take a long time to bring those price pressures under control. 

In fact, the RBA noted that inflation at the end of 2023 is expected to be near 5 per cent on its own forecasts, only reaching 3 per cent in 2025 – that’s a long time to be outside the target band. 

This week's rate move brings mortgage rates to an 11-year high and, with the signal of further rate hikes to come, they’re on track to hit the highest levels since the global financial crisis in coming months.

Without any indication from the RBA that a pause in the tightening cycle is imminent, we now await the March meeting to see if we get a signal then. 

Westpac economists continue to expect the cash rate to peak at 3.85 per cent in May. For the full report, visit WestpacIQ.