Australians are being warned to expect more interest rate hikes this year, after the Reserve Bank announced its latest hike on Tuesday, citing inflation fears.
The latest 0.25 percentage point hike takes the cash rate target to a decade high of 4.1 per cent – up four percentage points since May 2022.
Another $76 will be added to repayments on a typical $500,000, 25-year home loan, bringing the total squeeze since last May to about $1130.
Banks are already reacting, with Westpac announcing within hours of the RBA move that it would pass on the full cost of the rise to its lenders.
The June hike might not be the last, with RBA boss Philip Lowe saying more may still be needed.
That’s because central bankers fear inflation, though now easing, will prove too persistent with rising wages growth likely to flow into prices unless an unlikely rebound in productivity materialises in 2023.
“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” Dr Lowe said on Tuesday.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable time-frame.”
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RBA lifts rates to highest in more than a decade
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Rates hike a surprise
Economists were split on whether the RBA would hike interest rates in June, with forecasters from the Commonwealth Bank predicting a pause.
CBA chief economist Gareth Aird said the June increase surprised most economists surveyed by Bloomberg.
“The RBA’s tightening cycle has been incredibly aggressive. The board has delivered 400 [basis points] of rate hikes since May 2022,” he said.
But others did see the increase coming, with ANZ Bank’s top economist Adam Boyton foreseeing the June hike and predicting more.
“We expect another 25 [percentage point] increase from the RBA,” he said on Tuesday.
Sean Langcake, head of macro-economic forecasting at BIS Oxford Economics Australia, said the RBA is worried productivity growth will be too weak to support rising wages growth without stoking the inflationary flames.
“Their argument is that this is about giving them better confidence that inflation will get back to target in a reasonable time-frame,” he said.
“That’s not really a time-contingent statement … if that’s really the way they’re thinking about it we could be in for a few more [rate increases].”
Inflation fears spark hawkish turn
Mr Langcake said that the twin rate increases in May and June are a fresh hawkish turn from central bankers after they paused in April.
It suggests they see a growing risk that their strategy to return inflation back to their 2 to 3 per cent target band by mid-2025 could be derailed by persistently high prices for services – which has happened overseas.
Dr Lowe admitted as much on Tuesday, saying recent data suggested services inflation was still “very high”, despite a fall in prices for goods.
“The upside risks to the inflation outlook have increased and the board has responded to this,” he said.
Although 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.”
Mr Boyton’s view is that productivity growth is unlikely to pick up enough to support the RBA’s inflation plans without at least one more rate hike.
But it will likely come in August, he said, with a pause expected in July.
“The bank could well move ahead of that, however, with tomorrow’s national accounts likely to make for uncomfortable reading on the unit labour costs side,” he said.
“On our expectation for a peak of 4.35 per cent, risks are likely skewed toward the RBA needing to move more than just once more.”
