So, the RBA didn’t hike by 50 basis points. What now?

The Reserve Bank of Australia lifted the cash rate by 25 basis points today after four consecutive months of hawkish 50 basis point hikes. The cash rate now stands at 2.60% after the central bank began raising rates in May. However, the slower pace surprised investors with 79% of the market on Friday expecting another 50-basis point hike .

In his announcement today RBA Governor Philip Lowe acknowledged the pace of interest rate increases.

“The cash rate has been increased substantially in a short period of time,” said Lowe.

“Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” he added.

REA economist Paul Ryan believes the RBA’s decision to hike rates by 25 basis points today was a surprise and an indication the board’s end goal may be within sights.

“I think they’re signalling that as they get closer to where they think the cash rate should be to balance the economy based on current demand and supply, it was prudent for them to use a smaller step when they are close to try and feel their way to where that level is,” he said.

Ryan forecasts a further 25 basis point hike by the RBA in the November and December meeting. That will give the board time to observe the impacts of this year’s rate hikes, given that they do not meet in January.

“I think it's natural for the RBA to want to get to a point that they can wait and see what the effects of these rate hikes are on the economy by December,” he said.

“In my view, we're quite close to the peak in the cash rate at least for a bit,” Ryan added.

Equity markets reacted positively to the news, with the ASX 200 gaining 3.75% over the day, after closing last week down 1.5%. The S&P/ASX 200 Info Tech index also jumped 4.9% intraday amid growing hope for the sector.

Borrowers’ relief to be short lived

If the RBA may be starting to reach the peak of their hiking cycle it may be seen as a relief to borrowers in Australia. However, Ryan believes the comfort it provides mortgage holders will be limited.

“If you talk to a mortgage holder, they are not worried about 50 basis points or 25 basis points. Today may be a relief, but they’re worried about where interest rates and mortgage repayments are going to be next year,” said Ryan.

Borrowing capacity has fallen over 20% since April with variable rates climbing higher each month as banks pass rates onto consumers. In February, the average variable rate for the big four banks was at 2.24%, jumping 1.91% over the last six months, reaching 4.15% in September.

According to Rate City forecasts, if leaders are to pass on the 0.25%-point hike as they have for the past five months, the average owner-occupier with a $500,000 loan and 25 years remaining will see mortgage repayments rise by $74. This means that since the beginning of May, the total increase in monthly repayments will be $687.