Key Points
- The Reserve Bank of Australia has increased the interest rate by 50 basis points to 1.85 per cent.
- PropTrack senior economist, Eleanor Creagh, said it had been the fastest increase in rates since 1994.
The Reserve Bank of Australia (RBA) has lifted the official cash rate by 50 basis points to 1.85 per cent - its highest level in over six years.
The rate has been lifted for the fourth month in a row, in an attempt by the central bank to manage the country's rising inflation.
RBA governor Philip Lowe said in a statement after the board meeting the successive rate rises were required "to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy".
He flagged there could potentially be a pause in the successive rate rises at next month's board meeting with the RBA closely monitoring the economic data.
"The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market."
Why has the cash rate risen?
Dr Lowe said inflation was expected to peak later this year and decline back to the target range of between 2 per cent and 3 per cent, but it will be dependent on the global economic outlook.
"The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments," the statement said.
"The outlook for global economic growth has been downgraded due to pressures on real incomes from higher inflation, the tightening of monetary policy in most countries, Russia's invasion of Ukraine and the COVID containment measures in China."
Throughout the pandemic, Australia's interest rate sat at 0.10 per cent, but that started to change from May this year when the first of now four interest rate rises have been announced. The May rise was an increase of 25 basis points, the subsequent three rises were in increments of 50 basis points. Source: SBS News
"There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy. The floods this year are also affecting some prices."
The inflation rate is at the highest level since the early 1990s, according to the RBA Board statement.
The figure was 6.1 per cent over the year to the June quarter, with the underlying number at 4.9 per cent.
Inflation only rose by 3.5 per cent during the last calendar year.
How will this impact mortgage repayments?
Average homeowners with a $330,000 outstanding balance will have to find about $90 a month more for repayments, after this latest rate rise.
That is on top of an additional $220 in repayments from the three other rate rises since early May, according to Treasurer Jim Chalmers.
An Australian homeowner with a $500,000 mortgage will see monthly repayments rise by $140 a month - on top an additional $335 added since early May.
RateCity research director Sally Tindall told SBS News this is the central bank's fourth attempt at "getting the inflation genie back in the bottle", explaining that there is "method to their madness".
But Ms Tindall said there are concerns at the pressure people with mortgages are experiencing with four rate rises since May.
"Three months ago, many economists were predicting the cash rate would hit this level by Christmas. No one thought we’d be here already within the space of four months,” she said.
"I don't know that Australians really were fully prepared for rate hikes to come this hard and this fast."
How does the cash rate tie into inflation?
The inflation outlook is an influential factor in the RBA Board's decision on whether to raise the interest rate to keep inflation within the target range of between two per cent and three per cent.
The RBA forecasts the Consumer Price Index (CPI) inflation to be , and is expected to drop in 2023.
According to Mr Lowe, inflation will stay above four per cent over 2023, and around three per cent over 2024.
The fourth successive interest rate rise shows the level of concern about the inflation pressures, with the Reserve Bank of Australia says it is still aims to keep "inflation to the 2–3 per cent range over time". Credit: Reserve Bank of Australia
"Working in the other direction, people are finding jobs and obtaining more hours of work," he said.
How is the government responding?
The federal treasurer said the latest rate rise "doesn't come as a surprise".
"It's not a shock to anybody, but it will still sting," Dr Chalmers said.
During question time in parliament, Dr Chalmers pointed to his delivered last week, which stated the federal government would be using three measures to reduce economic pressures for Australians.
They include: reducing child care costs and the price of medicines on the government-subsidised PBS list; pushing for a rise in the minimum wage; and "untangling" the supply chain through measures like addressing labour shortages.
The Reserve Bank of Australia forecasts the Consumer Price Index inflation figure will reach around 7.75 per cent this year. Credit: Reserve Bank of Australia
He said despite the economic challenges ahead, he remained confident Australians would get through to the other side.
"Australians know that we are in for a difficult time ahead when it comes to the storm clouds in our economy, but we are confident that we will emerge on the other side of this stronger than before."
Last month, the government announced a wide-ranging review of the bank and monetary policy.
Who will this hurt most?
There will be increased financial stress for those making mortgage repayments and a number will consider refinancing options, said the managing director of the Finance Brokers Association of Australia, Peter White.
"These rate hikes are starting to make it very tough for many people and while I understand the RBA’s objectives, I also hope that they take into consideration the wider community and social ramifications when considering future rate increases. There is only so much that consumers can handle and after three large increases I hope there is some relief in coming months."
Australian home prices were falling at the fastest pace since the global financial crisis in 2008 and market conditions were "likely to worsen" as interest rates continue to rise, adding to costs for home buyers, property analytics firm CoreLogic reported on Monday.
Commonwealth Bank of Australia economists predict national home prices could fall 6 per cent by the end of the year, with a further 8 per cent decline possible in 2023.
PropTrack senior economist, Eleanor Creagh, said the cash rate rise had been the fastest increase in rates since 1994 - and that will impact the household budget.
"How household spending holds up against a backdrop of higher inflation and falling house prices versus savings and wealth buffers, and hopefully stronger wages growth, will be crucial in determining the loss of conditions in the economy and how high and fast the cash rate rises," Ms Creagh said.
"Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic.
"The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy."
Dr Chalmers said all Australians would be feeling the strain.
"Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures, like higher grocery prices and higher power prices and the costs of other essentials."
RateCity's Ms Tindall said homeowners should become more careful with their spending habits if they haven't already.
"Families should really start putting pen to paper to come up with a financial strategy to get them through the next 12 months. For some households, it’ll be a few nips and tucks to their budgets, but for others, it’ll involve making tough decisions," she said.
"If you get into trouble, put up your hand early and ask for help. Banks don’t want to see you default on your mortgage any more than you do."
Renters, small businesses also affected
Associate professor of social economic modelling at the University of Canberra Yogi Vidyattama said while homeowners who have variable interest rates will feel the pinch, his main concern is for renters.
He warned that rental prices placed on the market are indicative of current mortgages rates, and could lead to a concerning hike in expenses for those who can't buy a home.
"If this is happening, those who are renting are unable to buy, especially with the current interest rate, will be the ones that [should] prep the most," Associate Professor Vidyattama told SBS News.
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"The drop in the housing market will not help them because when the interest rate increases, it means they need to pay or have even more deposit."
Anneke Thompson, chief economist at CreditorWatch, also warned that default that the rising interest rate means defaults of small businesses were expected to rise by a percentage point over the next year.
The likes of Surfers Paradise in Queensland and Auburn in NSW are likely hotspots for mortgage defaults, flowing on to debt problems for local businesses.
How does Australia compare to other countries?
Associate Professor Vidyattama said Australia has "some luck" compared to other countries, with a high demand of commodities, including gas, coal and other minerals.
But it could backfire, he said, as international prices increase, so too will domestic prices.
He said it's difficult to compare Australia to other countries as most nations around the world are also feeling the effects of Russia's invasion of Ukraine.
CreditorWatch's Ms Thompson said that Australia remains in a fairly steady position compared to its western counterparts.
"It’s important to note that whilst Australia’s inflation number is double the upper range of the RBA’s target, it is far below that of other western nations, suggesting that the RBA caught the cycle earlier than central banks in other countries," she said.
Are more rate rises expected?
In the RBA statement, Dr Lowe indicated there is room for a pause in interest rate rises at next month's board meeting.
"The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path," he said.
Ms Thompson said forecasting the pace of interest rate rises in the future is a fraught task.
"Luck and other factors outside the control of the RBA will tell the story there.”
Additional reporting: AAP
