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The Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points today, bringing it to 3.10%, the strongest rate tightening cycle since the early 2000s.

The cash rate objective of 3.1% is the highest level in a decade. The RBA has made clear its intention to combat inflation, calling it a “scourge,” which has been demonstrated to have long-lasting, negative consequences on unemployment if not met with a forceful monetary policy response, thus the hike.

There are rumblings of a downturn in Australia’s economy, and that trend is likely to accelerate as the effects of monetary policy ripple through consumer spending. While the 0.2% drop in October retail sales was the first monthly drop in 2022, it was nonetheless a decline. Supply chain stresses and commodity prices have continued to decrease. Even while rental markets are still extremely tight, the pace of rise in rental prices has begun to reduce in certain locations, and new home approvals maintained their downward trend in October. Rent increases in the nation’s capital peaked at 3.1% in July, but have since slowed to 2.5% in the three months ending in November.

There are, however, some warning signs that suggest it may be too soon to cease the cycle of rate tightening. The ABS business indicators data for the September quarter, published this week, showed a pay and salary rise of 2.9%, the highest quarterly gain since 2007. The number of employed persons kept rising in October, while the unemployment rate dropped to 3.4% from 3.5%.

A direct result of the recent rate hikes is a decrease in the number of new mortgages being taken out. The monthly value of secured financing fell -17.9% from May through October of this year. In comparison to the same period a year before, annual sales have been trending down by -13.3%. An alarming -6.9% decline in consumer sentiment was recorded from January to November.

The APRA 300 basis point buffer on house loan serviceability assessment, implemented in October of last year, makes a hike of 300 basis points in the cash rate significant. There was an increase from April 2022’s low of 2.41% for new variable house loan rates for owner occupants to October 2022’s high of 4.58%. If the entire impact of the cash rate hikes in November and December is passed on, average new variable rates might rise to 5.08%. Given that average fixed-term rates of three years or fewer bottomed out at 1.95% for owner-occupiers, the average variable rate of 5.08% may cause a shock for individuals switching from low fixed-term rates.

With projections for the cash rate peak in October ranging from 3.1% to 3.85%, the cash rate has already hit the lower limit of major bank projections. The bulk of current fixed-rate mortgages are due to mature in 2023, putting the housing market through its paces in a higher-rate environment.