Inflation finally forces the RBA's hand

A headline inflation rate above 5 per cent was the catalyst for the Reserve Bank of Australia to finally lift interest rates for the first time in more than 11 years.

Reserve Bank of Australia Governor, Philip Lowe.
Reserve Bank Governor Philip Lowe has at last unlocked the RBA's tool to tackle inflation. (Image source:

A headline inflation rate above 5 per cent was the catalyst for the Reserve Bank of Australia (RBA) to finally lift interest rates, for the first time in more than 11 years.

Attributing the sudden burst of inflation above the RBA’s preferred 2-3 per cent band to international factors, RBA Governor Philip Lowe made it clear the Board was expecting to raise rates multiple times over the next couple of years to keep inflation in check.

“The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4.75 per cent; by mid-2024, headline and underlying inflation are forecast to have moderated to around 3 per cent,” Mr Lowe’s monthly policy decision statement said.

“These forecasts are based on an assumption of further increases in interest rates.”

While many households are struggling with stagnant wages and rapidly rising prices, the news of more rate rises will have borrowers considering how to contend with higher repayments and considering the possibility of refinancing.

The RBA said the outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation.

“The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” Mr Lowe said.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected.

“There is also evidence that wages growth is picking up, so given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

“The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high.”

Call for calm

REIA President, Mr Hayden Groves, said the increase in the cash rate will have modest impacts on affordability, with banks and mortgage holders well prepared.

“Wages are expected to increase, offsetting a rise in home loan payments where they are passed on by banks and market indications are that house prices will continue to stabilise,” he said.

“Aspiring home buyers will not be facing the extreme growth experienced since the onset of the COVID-19 pandemic so there is no need for those hunting for a home to put those plans on hold.”

“If the cash rate rises to the 2.1 per cent forecast, the proportion of median income required will rise by 6.2 per cent, which most financial institutions would have already stress-tested applicants for such rises.

“With market economists forecasting a cash rate of at least 2.0 per cent by mid-next year, if wages don’t increase it could be a completely different scenario that will see affordability at its worst in more than a decade,” he cautioned.

There is no need to panic, with most borrowers well-placed to finance moderate increases to mortgage repayments.

- Nicola McDougall, PIPA Chair 

Mr Groves said the rise in interest rates reiterates the urgent need for a national plan that addresses housing affordability and supply that should be supported by Federal and State Governments.

“While we support current government policies being presented during the election campaign and previous plans from the current government, prohibitive taxes such as the extremely high stamp duty payments are a key concern in limiting supply and affordability,” he said.

Mr Groves also noted that the Budget 2022 provided tax relief to low- and middle-income earners meaning disposal income is set to increase.

Property Investment Professionals of Australia (PIPA) Chair Nicola McDougall also said borrowers shouldn’t panic.

"Today’s minor cash rate adjustment was expected and is unlikely to impact the vast majority of borrowers.

"It's important to understand that at 0.35 per cent, the cash rate is still below what was before the pandemic, and well below the 2.0 to 2.5 per cent it was throughout the majority of the Sydney property boom that ended about five years ago.

"Mortgage applications have also been financially stress-tested on interest rates of up to about three percentage points higher – or 12 separate increases of 25 basis points – for quite some time as well.

"The last time the Reserve Bank adopted a monetary policy of increasing the cash rate because of inflationary concerns was from May 2006 to March 2008, when the cash rate was increased by two percentage points over nearly two years.

"Fundamentally, this means that there is no need to panic with most borrowers well-placed to finance moderate increases to mortgage repayments over the next two years." 

The banks have been raising interest rates independently of the RBA’s inactivity, with borrowers shunning fixed-rate loans in favour of variable rates.

Property Council NSW Executive Director, Luke Achterstraat, said historically low interest rates have no doubt impacted the demand for housing.

“COVID has reminded us of the true value of a home that supports our lifestyle and aspirations, with emerging tree- and sea-changers contributing for example to strong interest in regional areas,” he said.

“A rising rate curve however does not solve housing affordability; in fact, the problem becomes more acute for those facing higher borrowing and servicing costs in a housing market still defined by lack of supply.

“Regardless of where rates go, it is critical that governments address the significant supply side challenges that are limiting our access to homes,” he said.

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