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The Guardian - AU
The Guardian - AU
National
Peter Hannam

Interest rates rise again as Reserve Bank lifts cash rate to 2.6%

housing development
RBA interest rates: Australia’s Reserve Bank has lifted the cash rate for the sixth time in as many months to 2.6%. Photograph: Darren England/AAP

Australia’s Reserve Bank has lifted its key interest rate for the sixth time in as many months as the central bank seeks to stifle inflation before it rises to levels dogging economies elsewhere.

The RBA on Tuesday raised its cash rate 25 basis points to 2.6%. The increase was half the amount most forecasters predicted, a result that sent the Australian dollar lower by about half a cent to about 64.6 US cents. Stocks rallied higher for its best day in more than two years, gaining about 3.8%.

“The Board is committed to returning inflation to the 2% to 3% range over time,” the RBA governor, Philip Lowe, said in a statement accompanying the decision. “Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead.”

Annual inflation has been hovering at about 7% in recent months and the central bank and the federal government has said they expect it to peak below 8% by the end of 2022.

While the RBA was relatively late to increasing interest rates – starting seven months behind its counterpart in New Zealand – it has been catching up fast. Tuesday’s rise marked its longest consecutive run of increases, with the hikes since May now totalling 250 basis points, rivalling the 275 basis-point jump in borrowing rates by the RBA between August and December 1994.

Analysts were watching for a sign the RBA’s series of 50 basis-point increases would begin to taper off, and they got it on Tuesday. Bigger rises by other central banks to cope with higher inflation, such as in the US, have stoked fears that the rapidly tightening monetary policy will tip economies into recession.

The RBA indicated that worries about those global economic headwinds contributed to today’s move that snapped a record consecutive run of four 50 basis-point increases.

“One source of uncertainty is the outlook for the global economy, which has deteriorated recently,” Lowe said. “Another is how household spending in Australia responds to the tighter financial conditions.”

The treasurer, Jim Chalmers, said the RBA’s comments underscored the pressures facing the Albanese government as it prepares to release its first budget on 25 October.

Rising inflation, higher interest rates and falling real wages all set the scene, he said.

“Storm clouds are gathering in the international economy and that is important context for the budget we are currently finalising,” Chalmers said, adding the government “hadn’t changed our position” about the planned stage-three tax cuts.

Data released earlier on Tuesday indicated Australia’s economy remained resilient despite five RBA rate rises since its cycle began just prior to May’s federal election.

Job ads in September were little changed from their peak in June, according to ANZ. The tally remained about 56% higher than a year ago, with roughly one job opening for every person who is unemployed.

A measure of credit demand for August showed private borrowing was rising at an annual pace of 9.3%, according to the Australian Bureau of Statistics. That rise was more than economists expected and the fastest pace since 2008, at the start of the global financial crisis, investment bank UBS said in a briefing note.

The RBA said the economy remained on a sure footing, with high commodity prices helping.

“The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade,” Lowe said. “The labour market is very tight and many firms are having difficulty hiring workers.”

Prior to today’s RBA decision, markets have been expecting the cash rate would continue to rise and exceed 4% by mid-2023. Commercial bank economists were less hawkish, forecasting a peak cash rate of between 2.85% and 3.35%.

A rough rule of thumb is that each 100 basis points of increases in the cash rate converts into about $300 a month in extra repayments on a typical 25-year loan, according to data provider RateCity.

Today’s increase brings the cumulative additional monthly repayments since May for a typical mortgage holder to $687 for $500,000 borrowed, RateCity said.

CPA Australia’s business policy adviser, Gavan Ord, said Tuesday’s interest rate rise would put more pressure on businesses as well.

“This is unlikely to be the last cost increase faced by businesses this year,” Ord said. “We are facing economic pressures, the likes of which have not been seen since the 1980s.”

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