RBA lifts interest rates to level not seen since 2012
The Reserve Bank has raised the cash rate to 4.1 per cent, which is as high as it has been since early 2012, and has made it clear more rate hikes are likely looming.
The Reserve Bank of Australia (RBA) lifted the official cash rate by 0.25 per cent to 4.10 per cent at its monthly Board meeting on Tuesday (6 June).
The inflation bogey man was again the catalyst for the 12th rate rise in just over a year.
The latest increment means $15,168 has been added to the average Aussie mortgage in Australia since rates were last at 0.10 per cent in April 2022.
In Governor Philip Lowe’s statement, the RBA has reiterated it is “resolute” in its mission to bring inflation back into the target band of 2-3 per cent and that more hikes may be necessary.
If lenders pass on the 0.25 percentage point increase, as expected, the average owner-occupier who hasn’t renegotiated their loan since the start of the hikes will be on a rate of 6.86 per cent.
For someone with a $500,000 loan at the start of the hikes, their monthly repayments will rise by $76, with a total increase to their loan since May 2022 of $1,134.
Average Aussie mortgage repayments
Cash rate | Average home loan rate* | Average monthly repayment | Average monthly increase | Average annual repayment | Average annual increase | |
---|---|---|---|---|---|---|
April 2022 | 0.10% | 3.45% | $2,575 | - | $30,900 | - |
June 2023 | 4.10% | 7% | $3,839 | $1,264 | $46,068 | $15,168 |
In a relatively short Monetary Policy Decision, inflation was the showstopper topic, with wages and employment also rating a mention.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment,” Mr Lowe noted.
“Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this.
“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas.
“Unit labour costs are also rising briskly, with productivity growth remaining subdued.
“Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.”
More rate pain likely to come
The RBA Board's economic assessment ultimately left it with limited options other than the pull the key trigger in its arsenal.
But it is still a decision that will shock and stress many households, especially given the warning that, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.”
Associate Professor Mark Melatos, School of Economics, University of Sydney, said inflation, especially the trimmed mean of the CPI, remains significantly above the RBA's target band.
“The RBA is still in catch-up mode with respect to matching their cash rate settings to the inflation reality and currently seems particularly concerned about services inflation and potential wage increases unaccompanied by productivity gains.”
Tomasz Woźniak, Department of Economics, University of Melbourne, uttered the words no mortgage holder wants to hear.
“Based on the new data from May, all my forecast systems are aligned and indicate ... that further increases can be expected throughout the year.”
No shortage of rate rise critics
Despite the apparent strength for the case for a rate hike given the stubbornly high level of inflation, it was a still a surprise to many economists and experts.
In this month’s Finder RBA Cash Rate Survey, 39 experts and economists weighed in on future cash rate moves.
Less than half of the panel (44 per cent) correctly predicted a cash rate rise in June.
Many have questioned the effectiveness of of placing the burden of fighting inflation solely at the feet - and in the pockets - of mortgage holders and not through wider deflationary tools such as GST.
Real Estate Institute of Australia (REIA) President, Hayden Groves, said the RBA was destroying the Australian dream of home ownership.
“We are now at risk, driving the economy closer to a recession.
“The lags in the impact of previous RBA decisions are quite long and it is only now that banks are saying that it is having an impact on some borrowers with defaults starting to creep up.
“While the RBA will stick to economics, they cannot be immune to the political pressures with small business and young families holding a mortgage most impacted by the latest rate increase.
“The pace of rate increases leaves the economy in unchartered territory with the official cash rate now at its highest level in more than a decade. Some underlying inflationary pressures in the economy cannot simply be fixed by hiking interest rates,” Mr Groves said.
Leanne Pilkington, CEO and Director Laing+Simmons, said after last month’s rise, leaving rates unchanged at the June meeting would have been the prudent course.
“Removing the fuel excise anomaly, the most recent CPI data for April shows a continuation of the easing in inflation and as rental inflation remains a major concern, a further increase will hurt some sectors of the market more than others.”
Real Estate Institute of Queensland Chief Operating Officer, Dean Milton, questioned the RBA’s relentless approach.
“Inflation is yet to be tempered 12 months on from the first rise,” Mr Milton said.
“The April inflation figures showed that inflation was being driven by prices for life’s basics, such as housing, transport, and food – areas that are difficult to cut back on.
“As highlighted by various economists the retail recession is already here.
“With household consumption accounting for 50 per cent of Australia’s GDP, we are concerned about the potential recessionary impact of these interest rate rises.”