When first home buyer Sarah Treloar took out a mortgage to buy an apartment in the western Sydney suburb of Homebush about a month ago, she was prepared for her interest rate to go up almost immediately.
"I have played around with online interest rate calculators and I think I can definitely accommodate a few percentage point increases."
Ms Treloar's home loan is 100 per cent variable, which means the latest half a percentage point rate hike is likely to be passed on in full by her lender within weeks.
The Reserve Bank on Tuesday increased interest rates by 50 basis points or half a percentage point, taking the cash rate target to 0.85 per cent — well ahead of most economists' expectations.
If passed on in full by the banks, the rate rise will add $133 a month on a loan worth $500,000 over 25 years, and $265 a month on a loan worth $1 million.
But Ms Treloar is not too concerned.
"When I got my mortgage … I didn't go as high as I could have in terms of what my mortgage is and I also have a decent buffer in my discretionary income that can accommodate future rises."
After years of renting in share accommodation, she said it is worth it to have her own place. But there is still a little bit of stress about further rate rises.
More rate rises to come
Economists have noted that the latest rate rise is the biggest rate hike in 22 years and the first back-to-back rate hike since May 2010.
In early May, the RBA lifted Australia's official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent.
Forecasts are that the cash rate could hit 2.5 per cent by mid next year or the end of next year.
If this happens, a borrower with a $500,000 loan balance could see their monthly repayments rise by $652 a month by Christmas next year.
In announcing the decision, Reserve Bank governor Philip Lowe said the rise was in response to the fact that "inflation in Australia has increased significantly".
Annual inflation increased to 5.1 per cent in the March quarter, driven by higher housing construction costs and fuel prices.
Dr Lowe said inflation was expected to increase further, but would then decline back towards its 2 to 3 per cent target range by next year.
"As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.
"Today's increase in interest rates will assist with the return of inflation to target over time."
Dr Lowe said the Reserve Bank would likely keep raising rates over the months ahead, pulling back the "extraordinary monetary support that was put in place to help the Australian economy during the pandemic".
The economy was "resilient", growing by 0.8 per cent in the March quarter and 3.3 per cent over the year.
He noted that "employment has grown significantly" and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years.
"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."
He said the bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.
Economists say more pain lies ahead
ANZ's head of Australian economics David Plank warned borrowers to expect large interest rate hikes in July and August.
"The [Reserve Bank governor's] statement says explicitly that, "the board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead'," Mr Plank noted.
"This is stronger than the language set out in May and suggests at least another 50 basis points increase is on the cards over the next few months."
He said a big hike in August seemed more likely than July, as it would be after the second-quarter inflation data was released as well as more employment reports.
"One or two more rate hikes over the remainder of 2022 are possible if the data remain 'resilient' despite all the various pressures facing households — something the RBA highlights as a risk," he said.
AMP chief economist Shane Oliver said predicted the cash rate to rise to 1.5 to 2 per cent by year end and to peak at 2 to 2.5 per cent by mid next year.
While many households were well ahead on their payments he said many Australians would experience "a significant amount of pain from higher rates".
"For example, RBA analysis indicates that about 25 per cent of variable rate borrowers would see a 30 per cent or more rise in mortgage payments from a 2 per cent rise in rates," he said.
CBA's Gareth Aird said the bank had revised its forecasts for the cash rate.
The bank now expects the RBA to deliver a further half a percentage point rate hike in July followed by quarter percentage point hikes in August, September and November that would see the cash rate target at 2.1 per cent by the end of the the year.
"The risk is a higher year end cash rate of 2.35 per cent which could occur with a hike of 50 basis points in August," Mr Aird said.
Rising cost of living putting pressure on Australian households
But Dr Lowe said one source of uncertainty about the economic outlook was how household spending evolves, given the increasing pressure on Australian households' budgets from the rising cost of living.
He said the board would be paying close attention to these factors as well as the global outlook, "which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities".
Treasurer Jim Chalmers said rising interest rates was "very difficult news for all of those Australians who are already facing skyrocketing costs of living in this country".
He said while some Australians had been able to build a buffer in their home loan repayments, not everybody had been able to do that and some were already "doing it tough".
"When you have an economy which is characterised in part by skyrocketing costs of living including spiking prices for energy and groceries, you can see that today's decision will make it that much harder for a number of Australians," Mr Chalmers said.
Shadow Treasurer Angus Taylor said "the most important thing governments can do to contain interest rates is to contain spending".
He said Labor had committed to $45 billion of off-budget spending.
"This is the kind of unnecessary spending which will fuel interest rates, fuel inflation and make life harder for all Australians."
Banks to pass on rate hikes in full
RateCity research director Sally Tindall said two rate hikes were not going to magically cure Australia's inflation woes.
"The RBA will need to hike again, potentially as early as next month," she said.
"They are going to take a rapid-fire approach over the next six to 12 months to hiking the cash rate and getting our inflation under control."
She said the cash rate could hit 1.75 by the end of this year and 2.5 per cent by next year.
"If we do see that by Christmas of next year, someone with that $500,000 mortgage today could see their monthly repayments go up by over $650 every single month," she said.
"I think many households around Australia will be in shock at the news of this double hike today.
"However, the RBA has been clear that the cash rate needed to go up. It was still at emergency setting levels.
"It's now marginally above, we've got to remember that these record low rates couldn't last forever."
She anticipated the banks would pass on the latest hike in full to their variable rate customers, but that there may be discounting for new customers.
Repayments on business loans will also rise
It is not just home owners who are on the receiving end of interest rate hikes. Repayments on many business loans will likely increase too.
But some businesses may also see a drop in revenue, as consumers withhold spending their cash to make higher mortgage repayments.
The Barberhood director Renee Baltov has already noticed a change in customer behaviour.
"So that would have a direct financial impact on the revenue of the business, which is kind of difficult just coming out of a pandemic."
Ms Baltov runs two barber shops in Sydney's CBD. She told ABC News it has been a tough two years and operators like her are still trying to get back on their feet.
"People are starting to come back to the CBD, we're seeing the three-day work week at the moment, people [are still] working from home," she said.
"That's really challenging for businesses that have got commercial rent, based off five days a week."
Ms Baltov said rising costs across the board, coupled with less revenue coming in, isn't an easy combination.
"All these rising costs are really going to impact and now that interest rates are going up, that's also going to be something that we're going to have to work through."
Just as the pandemic economic impact seems to be slowly recovering, she' is concerned not all businesses may survive this next economic hit.
"There are going to be business owners that may not have, you know, enough discretionary cash floating in their business to kind of get through to the other end, so of course, they're going to have to make tough decisions."
