Interest rates: Why ALL of the Big Four banks are expecting another rate rise on Melbourne Cup Day

All Australian Big Four banks are expecting another rate hike on Melbourne Cup Day – the seventh consecutive monthly rise.

The minutes of the Reserve Bank of Australia meeting in October strongly indicated that tackling the worst inflation in 32 years remained the top priority, meaning interest rates continue to rise.

“When considering the policy decision, members noted that inflation in Australia was too high, as was the case in most countries,” it said.

“This would probably require further interest rate hikes in the coming period.”

Cash interest rates rose 0.25 percentage point in October to a nine-year high of 2.6 percent, with borrowers already hit by the worst monetary policy tightening since 1994.

The Commonwealth Bank, Westpac, NAB and ANZ all expect another quarter of a percentage point increase on Nov. 1, bringing it to 2.85 percent.

This would also be the seventh consecutive monthly rate increase, the highest in a row since the RBA began publishing a target cash rate in 1990.

Even a smaller quarter of a percentage point rate hike would force borrowers with an average $600,000 mortgage to find another $90 per month for their monthly repayments.

This borrower would see its repayments rise from $2,546 to $3,145 if the RBA cash rate rose by 25 basis points.

A Commonwealth Bank variable loan rate would rise from 4.54 percent to 4.79 percent, with banks likely to pass on the Reserve Bank increase in full.

That would also be a $315 increase in average monthly repayments since early May, when RBA interest rates were still at a record low of 0.1 percent.

The RBA’s minutes also suggested that future rate hikes would be 0.25 percentage point, rather than the larger 0.5 percentage point increases in June, July, August and September.

Board members noted that “arguments were well balanced” between a larger and smaller rate hike this month.

“However, they concluded that the argument to raise the cash interest rate by 25 basis points was the strongest at the current meeting,” the minutes said.

“A smaller increase than had been agreed in previous meetings was justified, as the cash interest rate had risen sharply in a short time and the full effect of that increase was in the offing.”

Westpac chief economist Bill Evans noted that the 0.25 percentage point increase in October surprised financial markets, which had expected a larger 0.5 percentage point increase.

“The detailed description in the minutes of the discussion surrounding the surprising 25 basis point decision – essentially it’s a trade-off between losing credibility and avoiding tightening too much,” he said.

Gareth Aird, Commonwealth Bank’s Australian economics chief, said the RBA was now concerned about inflicting too much pain on borrowers.

“The minutes note that the full effects of higher interest rates have not yet been felt in mortgage payments and that the cash interest rate hikes were close to the interest buffer applied when many current borrowers took out their loans,” he said.

Banks are required to assess a borrower’s ability to cope with a three percentage point increase in variable mortgage rates, under the rules of the Australian Prudential Regulation Authority.

Another rate hike in November means borrowers would have absorbed 2.75 percentage points in rate hikes in six months.

Headline inflation rose 7 percent in the period to July, the fastest pace since 1990.

Though it fell to 6.8 percent in August, the RBA expects it to hit a new 32-year record of 7.75 percent in 2022.

Inflation has been consistently above the RBA’s 2 to 3 percent target since late 2021, but worsened in early 2022 when the Russian invasion of Ukraine led to sanctions that cut global crude oil supplies.

The RBA’s vice-governor Michele Bullock said an October rate hike was warranted and stated more would follow.

“There was no doubt that a further increase in interest rates was justified,” she said.

‘Inflation is too high in Australia and is expected to rise further.

“You must not doubt, however, that the Council is determined to do whatever it takes to bring inflation back up to target.”

The Australian Bureau of Statistics will publish inflation figures for the September quarter on October 26.

ANZ expects the data to show an inflation rate of 7 percent, which senior economist Catherine Birch said has risen to 7.75 percent this year.

Ms Birch said high inflation made a rate hike in December more likely, although ANZ expects the next rate hike, after November, to be in February, bringing the spot rate to 3.1 percent.

This will also be the first time the ABS releases quarterly and monthly inflation data simultaneously.

Treasury updates its inflation forecasts in its October 25 budget, Labor’s first since 2013.