RBA resumes its attack on inflation with another rate hike

The Reserve Bank of Australia (RBA) has hit Australian borrowers with an 11th rate rise in 12 months, lifting the official cash rate by 0.25 per cent to 3.85 per cent.

Tuesday’s interest rate hike defied the expectations of most commentators, who felt that the steady decline in the inflation rate might be enough to assuage the RBA. The market had only priced in a 13 per cent chance of rates rising this month.

Interest rates are now at the highest level since April 2012.

But RBA Governor Philip Lowe said even though inflation in Australia has passed its peak, at 7 per cent it is still too high and he expects it will be some time yet before it is back in the target range.

The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. 

Mr Lowe was still reluctant to offer hard-hit borrowers any real glimpse of hope that the cycle of interest rate rises was at an end.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he noted in the RBA Monetary Policy Decision.

“The Board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

And in a line that is now well rehearsed, he added, as he has done for many months, “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

The current cycle of interest rises has been the steepest in history.

The RBA’s uncertainty about how persistent inflation might be comes amid still-tight labour markets and new evidence that housing prices have moved through their low point.

There was a shift in tone this month, however, with Mr Lowe admitting many borrowers were now doing it tough. He has previously made a point of arguing that Australians are well ahead of their mortgage repayments and well-equipped to handle the burden of higher repayments.

“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances,” he said.

Borrowers feeling rate hike pain

The latest rate increase will add around $78 a month onto repayments for a half a million dollar home loan, if passed on in full by the banks.

Graham Cooke, head of consumer research at Finder, said the news is a heavy blow for many.

“Australians with an average loan size of $586,000 will be forking out around $14,000 more per year compared to what they were paying this time last year.

“The market consensus is that we are now at the peak of a frenzied, steep climb but the question yet to be answered is how well Aussie homeowners will be able to breathe in the thin air.

“If the RBA does ease the cash rate, it will likely do so gradually, with a watchful eye on inflation,” Cooke said.

More than 2 in 5 Australians said their rent or mortgage was one of their most stressful expenses in April – the highest level since Finder’s Consumer Sentiment Tracker started in May 2019.

Real Estate Institute of Queensland (REIQ) Chief Operating Officer Dean Milton said the RBA’s decision to forge ahead with its aggressive tightening cycle would weigh heavily on homeowners and investors.

“We have seen regulatory chaos from state and federal governments, and whiplashing back to another interest rate rise only adds to this pain,” Mr Milton said.

“There’s barely been time for the market to absorb the lagged impact of the previous 10 consecutive rises and reassess the approach based on this.

“Equally, it’s difficult to see how would-be buyers can catch a break when their borrowing capacity has been on such an unsteady footing.”

Mr Milton said economic conditions were already stifling future supply and pushing the dream of home ownership further out of reach for many.

“Building approvals for houses are down, which will have impacts on short-to-medium term supply, and lending statistics are also showing buyer activity is continuing on a downward trend,” he said.

“Inflation in Queensland is being driven by inelastic goods and services such as electricity up 32.5 per cent and health up 6 per cent for the quarter, which interest rates do nothing to quell.

“It’s time for state, federal and local governments to do their part in fighting inflation.

“Fiscal policy needs to match monetary policy, and what we need now is action to remove impediments to new housing supply, investment in social housing, and a focus on overall spending to ensure it does not lead to further increases in inflation.”

Have interest rates peaked?

Higher interest rates are deterring Australians from borrowing for homes and other assets, with only a small minority saying they expect interest rates to be lowered.

A survey commissioned by Money.com.au found that 70 per cent of Aussies say growing rates would have put them off a home, car or personal loan.

Just 15 per cent believe rates have almost peaked and will start to come down this year.

Ahead of Tuesday’s interest rate decision, all four of Australia's big four banks had tipped interest rates would peak at their new level of 3.85 per cent.

None of those forecasts, however, predicted that 3.85 per cent would be reached by May 2023. The banks’ expectations that rates would subsequently start to fall from late-2023 to mid-2024 but with the RBA defying public opinion so blatantly with its latest rate hike, all bets would appear to be off.