RBA

Reserve Bank hikes interest rates for the fourth time in a row with an extraordinary 0.5% jump

PHOTO: The Reserve Bank of Australia has raised the cash rate by half a percentage point with governor Philip Lowe hinting at further increases to tame the worst inflation in two decades. 

  • Reserve Bank of Australia has raised the cash rate by half a percentage point to a six-year high of 1.85 per cent
  • Governor Philip Lowe has hinted at more rate rises to tame inflation rate of 6.1 per cent – highest since 2001
  • Consumer price index was the highest since the December quarter of 1990 when GST introduction excluded
Man Huynh

Man bought a home last year expecting rates to stay low. The RBA’s string of rate rises has left him struggling

The Reserve Bank of Australia has raised the cash rate by half a percentage point with governor Philip Lowe hinting at further increases to tame the worst inflation in two decades.

The move takes the cash rate to a six-year high of 1.85 per cent – up from a three-year high of 1.35 per cent.

This means a homeowner paying off an average $600,000 mortgage will have to find an additional $169 for their monthly mortgage repayment.

The latest increase also means borrowers will no longer be able to get a low variable rate of under three per cent.

The RBA has now raised rates in May, June, July and August marking the steepest pace of increases since 1994.

It has raised rates by 50 basis points at three straight meetings, the first time this has occurred since the Reserve Bank published a target cash rate in 1990.

This has taken the cash rate from a three-year high of 1.35 per cent to a six-year high of 1.85 per cent. This would see someone paying off an average $600,000 mortgage cop a $169 increase in their monthly mortgage repayments

This has taken the cash rate from a three-year high of 1.35 per cent to a six-year high of 1.85 per cent. This would see someone paying off an average $600,000 mortgage cop a $169 increase in their monthly mortgage repayments

In a statement, Dr Lowe said the RBA would struggle to get inflation back within the central bank’s two to three per cent target any time soon, with Russia’s war with Ukraine keeping petrol prices elevated.

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Historic inflation levels

JUNE 2022: 6.1 per cent

MARCH 2022: 5.1 per cent

JUNE 2001: 6.1 per cent

DECEMBER 1990: 6.9 per cent

JUNE 1990: 7.7 per cent

MARCH 1990: 8.7 per cent

JUNE 1987: 9.3 per cent

Australian Bureau of Statistics annual consumer price index data released quarterly

‘The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,’ he said.

The RBA chief strongly hinted at more rate rises to come, noting ‘the board places a high priority on the return of inflation to the two to three per cent range over time, while keeping the economy on an even keel’.

‘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,’ Dr Lowe said.

‘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.’

Inflation in the year to June surged by a two-decade high of 6.1 per cent as unemployment fell to a 48-year low of 3.5 per cent.

Without the introduction of the GST, this was the steepest headline inflation, also known as the consumer price index, since 1990.

Both the RBA and Treasury are expecting inflation to hit a 32-year high of 7.75 per cent later this year and remain outside the RBA target band until 2024.

Treasurer Jim Chalmers told Parliament the latest rate rise would be hard on families.

‘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 power prices and the costs of other essentials,’ he said.

The rapid series of rate rises are occurring despite Dr Lowe repeatedly promising last year to keep the cash rate on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’.

Dr Lowe hinted that low unemployment could lead to wage-cost pressures ‘as firms compete for staff in the tight labour market’.

The Reserve Bank of Australia has raised the cash rate by half a percentage point

The Reserve Bank of Australia has raised the cash rate by half a percentage point

Reserve Bank governor Philip Lowe (pictured) has strongly hinted at more rate rises to come, noting 'the board places a high priority on the return of inflation to the two to three per cent range over time, while keeping the economy on an even keel'

Reserve Bank governor Philip Lowe (pictured) has strongly hinted at more rate rises to come, noting ‘the board places a high priority on the return of inflation to the two to three per cent range over time, while keeping the economy on an even keel’

‘A key source of uncertainty continues to be the behaviour of household spending,’ he said.

‘Working in the other direction, people are finding jobs and obtaining more hours of work.

‘Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic.’

Warwick McKibbin, who sat on the Reserve Bank board from 2001 to 2011, said the RBA should publish the opinions of individual board members, like the High Court does with judges, so borrowers had a better idea of decisions each month.

‘The debates around the board should be completely open and transparent,’ he told Daily Mail Australia.

‘That gives you more information, that there are people out there that believe something else might happen and if they’re credible people, then I’ve got two possible outcomes: what if one’s right, what’s my situation?

‘The uncertainty just isn’t communicated well enough: it’s part science, part art.’

Professor McKibbin said Dr Lowe’s ‘qualified statement’ in some months of 2021, about keeping the cash rate on hold, was misrepresented by the media.

‘It wasn’t transparent exactly what he meant and the communication was the problem,’ he said.

‘Back in October, no one would have known what the world would be like in 2022.

‘The reason they got it wrong wasn’t necessarily because they had the wrong framework, it was because some pretty big shocks came along like the war in Ukraine which really propelled the supply side shocks.’

In a statement, Dr Lowe said the RBA would struggle to get inflation back within the central bank's two to three per cent target any time soon, with Russia's war with Ukraine keeping petrol prices elevated (pictured are houses in Sydney's west)

In a statement, Dr Lowe said the RBA would struggle to get inflation back within the central bank’s two to three per cent target any time soon, with Russia’s war with Ukraine keeping petrol prices elevated (pictured are houses in Sydney’s west)

RateCity research director Sally Tindall said the latest 0.5 percentage point increase from the Reserve Bank means borrowers would no longer have the option of a variable mortgage rate under three per cent.

Warwick McKibbin, who sat on the Reserve Bank board from 2001 to 2011, said the RBA should publish the opinions of individual board members, like the High Court does with judges, so borrowers had a better idea of decisions each month

Warwick McKibbin, who sat on the Reserve Bank board from 2001 to 2011, said the RBA should publish the opinions of individual board members, like the High Court does with judges, so borrowers had a better idea of decisions each month

‘Today’s hike could be the tipping point for families feeling the heat,’ she said.

‘The RBA has a job to do and the faster it gets it done, the more successful it’s likely to be, but for many families these hikes are starting to sting.’

The big banks were all expecting a 0.5 percentage point rate rise and are likely to pass on the hikes to consumers.

A borrower with an average $600,000 from the Commonwealth Bank would see their variable rate climb from 3.39 per cent to 3.89 per cent, causing their monthly repayments to rise by $169 from $2,658 to $2,827.

ANZ, Commonwealth Bank, Westpac and NAB are all expecting the RBA to follow up with another 50 basis point rate rise in September, taking the cash rate to a seven-year high of 2.35 per cent.

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