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Monthly inflation spike puts rate hikes back on the menu

Eden Radford avatar
Eden Radford
- 6 min read
Monthly inflation spike puts rate hikes back on the menu

The prospect of a 14th rate hike is back on the table as the latest ABS monthly CPI indicator shot up to 4 per cent in the month of May.

The monthly CPI indicator shows annual inflation increased for the third month in a row and is now sitting at 4.0 per cent in May, the highest level since November of last year.

Leading the charge was electricity, automotive fuel, rents and insurances. Fruit and vegetables also saw a notable rise.

Removing volatile items and holiday travel, however, the monthly indicator dropped from 4.1 per cent to 4 per cent – an important measure in the eyes of the RBA.

Monthly CPI Indicator: ABS

Monthly CPI Indicator

Source: ABS monthly CPI indicator

ABS Consumer Price Index, Australia - annual movement since peak

Monthly CPIEx. volatile items + holiday travel
Dec-228.4%7.2%
Jan-237.5%6.9%
Feb-236.8%6.8%
Mar-236.3%6.9%
Apr-236.7%6.5%
May-235.5%6.4%
Jun-235.4%6.1%
Jul-234.9%5.8%
Aug-235.2%5.5%
Sep-235.6%5.5%
Oct-234.9%5.1%
Nov-234.3%4.8%
Dec-233.4%4.2%
Jan-243.4%4.1%
Feb-243.4%3.9%
Mar-243.5%4.1%
April 243.6%4.1%
May 244.0%4.0%

Source: ABS Consumer Price Index indicator

The RBA Governor, following last week’s monetary policy meeting, said the risk of a rate hike had not increased, but did note “we need a lot to go our way if we are going to bring inflation back down to the 2–3 per cent target range”.

Today’s monthly inflation data, while less reliable than quarterly CPI as it only measures certain baskets of goods, is unlikely to be chalked up as a tick by the RBA.

Borrowers should start preparing for a rate hike today

Borrowers should start preparing their budgets for the possibility of not just one, but potentially two more rate hikes before the year’s end.

For an owner-occupier with $500,000 debt at the start of the hikes and 25 years remaining, two more rate hikes would add another $150 on to their monthly mortgage repayments.

If the borrower had not renegotiated their rate since the start of the hikes in May 2022, two more hikes would translate into a total increase in monthly repayments of $1,360 across what would then be 15 hikes, four of which were doubles.

Potential impact of two more RBA hikes on a borrower’s monthly repayments before Dec 2024

Based on an owner-occupier who has not renegotiated their rate since the start of the hikes

Loan size at start of hikes2 x 0.25% hikesTotal increase - 15 hikes
$500,000$75 + $75$1,360
$750,000$112 + $113$2,040
$1,000,000$150 + $150$2,720

Source: RateCity.com.au. Notes: based on an owner-occupier paying principal and interest with 25 years remaining at the start of the hikes on the average variable rate back in April 2022 of 2.86%. Assumes cash rate increases are in August and November 2024 and that banks pass them on in full.

How can borrowers prepare?

  1. Pick up the phone and ask for a rate cut. If you can get 0.25%-points knocked off your current mortgage rate, you’ve protected yourself against one RBA hike. A 0.50%-point cut will protect you against two RBA hikes – provided you keep your monthly repayments exactly the same as they are today.
  2. Put your stage three tax cuts into your mortgage, either via the offset account or as extra repayments. Someone earning $100,000 before tax is set to get $2,179 back into their pay packet over the next year, or $182 a month. This extra $182 a month should cover the cost of two more rate hikes for someone with a half a million-dollar mortgage today. Paying the extra money now will help build a buffer in your mortgage and reduce your interest bill in the meantime.
  3. Review your features and fees. Are you paying for an offset account you don’t use or is it something you don’t have, but could take advantage of? Is it worth refinancing to a different lender? The RBA is not meeting until 5-6 August. Use this time to review your home loan to make sure you’ve got the best fit for your finances.

RateCity.com.au research director, Sally Tindall, said: “Next month’s quarterly CPI figures will be the moment of truth for the RBA. If it's way off track, the Board will have no choice but to act, potentially as soon as August.”

“The wait-and-see approach has suited the RBA up until now, however, the reality is, after five consecutive meetings on hold, the Board is running out of runway to keep going in this holding pattern,” she said.

“The Board is likely to have wanted to take the time to see how the extra cash from the stage three tax cuts and the electricity rebate had on household consumption, but with the clock ticking in the background it could well speed up any decision to hike.

“The stage three tax cuts might add to the case for a cash rate hike, but they’ll also serve as a lifeline for many borrowers if another one eventuates.

“If you’ve got a mortgage, start preparing for another one, if not two rate hikes today, if you haven’t done so already.

“You can do this by negotiating with your bank for a lower rate, but also by reviewing your home loan features to make sure you’re maximising the tools available to reduce your interest bill.

“It’s also worth spending the time looking at the option of refinancing. The RateCity.com.au database shows there are still around 30 lenders offering variable rates under 6 per cent to owner-occupiers looking to refinance.

“A mortgage rate that starts with a ‘5’ will put you in good stead to tackle whatever the next six to 12 months holds,” she said.

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Product database updated 17 Jul, 2024

This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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