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RBA interest rates: Board piles on the pain for homeowners with 50 basis-point increase in cash rate to 1.35pc

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Adrian LoweThe West Australian
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In an unprecedented third consecutive move at this level, the RBA board has hiked interest rates again as it tries to ward off rampant inflation.
Camera IconIn an unprecedented third consecutive move at this level, the RBA board has hiked interest rates again as it tries to ward off rampant inflation. Credit: Dean Lewins/AAP

The Reserve Bank of Australia has lifted the official cash rate by half a percentage point, pushing it to 1.35 per cent.

In an unprecedented third consecutive move at this level, the Reserve Bank board on Tuesday elected to again hike rates by 50 basis points as it tries to ward off rampant inflation.

The official cash rate has now risen by 125 basis points from its record low emergency setting of 0.1 per cent in early May, and RBA governor Philip Lowe has flagged there will be more increases to come this year.

Existing mortgage holders with a $500,000 loan and 25 years remaining will pay an extra $137 a month, according to calculations by Rate City — bringing to $333 the increase since rates began moving higher in May.

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For those with 25 years remaining on a $750,000 loan, the figure rises to $205 a month — $499 more since May.

In his post-board meeting statement, Dr Lowe said inflation was forecast to peak this year and decline back to the RBA’s target of 2 to 3 per cent next year.

“As global supply-side problems continue to ease and commodity prices stabilise, even if at a high level, inflation is expected to moderate,” he said.

“Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services.”

Dr Lowe reiterated that the RBA board was committed to doing “what is necessary” to return inflation to the target range, flagging again that it would take “further steps” to normalise interest rates — which he has previously said is around 2.5 per cent.

Dr Lowe flagged ongoing certainty around household spending behaviour given strong spending data but budgets under pressure from higher rates and prices — and a decline in housing prices.

“The Board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy,” he said.

Continuing uncertainty in the global outlook, such as China’s COVID controls and the impact of the war in Ukraine on energy and agriculture, would also require close attention, Dr Lowe said.

Treasurer Jim Chalmers said the new Government’s job was to build a resilient economy and budget.

He said the decision of the RBA was “very challenging news” for hardworking Australians.

“Today’s 50 basis point rate rise comes at a time when a significant number of Australians are confronted by yet another large-scale natural disaster, which will only add to these ongoing challenges,” he said.

The latest hike marked the quickest and biggest increase to the cash rate since 1994, when the RBA hiked by 275bp within five months — 75bp in August and 100bp each in October and again in December.

Markets are pricing in a peak cash rate of almost 3.55 per cent for May and June next year, before declining marginally towards the end of 2023. Market forecasts have been well above the RBA’s own forecasts but Dr Lowe last month acknowledged they had historically been accurate.

SYDNEY, AUSTRALIA - MAY 03: Governor of the Reserve Bank of Australia Philip Lowe speaks during a press conference on May 3, 2022 in Sydney, Australia. The Reserve Bank of Australia has today lifted the official interest rate to 0.35 per cent following a meeting today. The rise is the first interest rate increase since November 2010. (Photo by Louie Douvis - Pool/Getty Images)
Camera IconGovernor Philip Lowe has warned more rate hikes are likely this year. Credit: Pool/Getty Images

Dr Chalmers said the government had been upfront about the economic challenges ahead.

“When it comes to inflation we expect it to get worse before it gets better, and the Reserve Bank has flagged further rate rises.

“That’s why we’re working hard to deliver on our commitments to boost the capacity of the economy and reduce the cost of living.”

RateCity research director Sally Tindall said though Dr Lowe had previously pushed back on suggestions the cash rate could hit 4 per cent by year’s end, the RBA was “still likely to rip the band-aid off quickly”.

Given forecasts were now for a 2.6 per cent official cash rate by year’s end — a 2.5 percentage point increase from May — Ms Tindall said it was important borrowers took stock.

“For the average borrower with a $500,000 loan that’s a $685 monthly repayment increase,” she said.

“Borrowers should sit down and work out what a 2.5 percentage point interest rate increase would do to their monthly repayments. If that number doesn’t sit well with them, the time to take action is now.”

CreditorWatch chief economist Anneke Thompson said the RBA had likely adopted a “wait and see” approach around the impact of its rate rises and would need to keep increasing until they felt comfortable inflation was on the way down.

“Of continuing concern is supply side inflation,” she said.

“Neither the RBA or the government has much control over this type of inflation, and it will take some months to determine if reducing demand has enough of an impact to bring prices under control.”

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