The Reserve Bank has kicked off the New Year with another squeeze on homeowners, lifting its target cash rate to a decade-high 3.35 per cent.
In a move that will add another $76 to typical monthly mortgage bills, the RBA raised interest rates by 0.25 percentage points on Tuesday afternoon, as widely forecast.
It was the ninth interest rate hike in a row and the first since December, when the central bank last met. Rates began rising in May 2022.
A homeowner paying down a $500,000, 25-year mortgage will now fork out about $900 more a month than they were last May, according to RateCity figures – or more than $11,000 extra a year.
In a statement on Tuesday, RBA Governor Philip Lowe acknowledged that the cost of living was putting family budgets under pressure, but said even higher rates would be necessary to curb sky-high inflation.
He said the 6.9 per cent rise in underlying inflation over the December quarter was “higher than expected” as global factors combined with “strong domestic demand” to push prices up faster than RBA forecasts.
“The board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy,” he said.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”
Economists had widely expected the 0.25 percentage point hike.Experts were paying closer attention to details in Dr Lowe’s statement which might suggest what the RBA will do next, amid fears the risk of a recession is building with each interest rate rise.
At least one further rate hike in the first half of 2023 is expected, though some economists think more action may be needed to put downward pressure on inflation by squeezing family budgets.
“Hiking rates won’t be a popular move, but with inflation at a three decade high, it was a necessary one,” Indeed APAC economist Callam Pickering said.
“Further hikes are likely this year until inflation is perceived to be under control or genuine cracks begin to appear across the Australian economy.”
Sean Langcake, head of macroeconomic forecasting at BIS Oxford, said another rate hike in March is “all but certain”.
“On balance, we expect the bank will keep rates on hold for a period after the March meeting, but there is material risk that rates will peak above 3.6 per cent,” he said.
Treasurer Jim Chalmers said higher mortgage repayments would put extra pressure on family budgets, and by extension the Australian economy more broadly.
“It’s our job to focus on the broader pressures that are coming at us from around the world and being felt around the kitchen tables of this country,” Dr Chalmers told Parliament in the minutes after the rate hike.
