The Reserve Bank has resumed heaping pain onto Australian home owners, raising interest rates in May for the 11th time in a year.
The central bank smashed hopes that an April reprieve in the RBA’s record breaking rate hike cycle would continue on Tuesday, raising its cash rate target 0.25 percentage points to a decade-high 3.85 per cent.
It will add another $78 to monthly repayments on a typical $500,000, 25-year loan, bringing total increases to more than $1000 in the past year.
About half of economists had expected the RBA to repeat its April move and pause rates again in May amid new evidence that inflation is falling.
But RBA governor Philip Lowe said prices were still rising too quickly.
“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,” he said in a statement on Tuesday afternoon.
“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”
Treasurer Jim Chalmers said the May rate hike was a “really difficult decision” for Australian homeowners who were “already under the pump”.
“This is a reminder that inflation remains the primary challenge in our economy. This is a reminder of the difficult economic conditions in which we frame this second budget,” he said in Canberra.
Dr Lowe left the door open to further interest rate hikes later this year, though the RBA’s language remained “may” – rather than the “will” that was in its statements earlier this year, suggesting this could be the last.
That’s the view of some economists, with the Commonwealth Bank in particular predicting that the 3.85 per cent cash rate will be the peak.
CoreLogic research director Tim Lawless said May’s rate decision was “always going to be line ball” and that Tuesday’s increase was likely to be the last in this cycle.
“Although inflation has been trending lower since peaking … today’s rate hike reflects the RBA’s uncertainty about how ‘sticky’ inflation might be amid persistently tight labour markets and new evidence that housing prices have moved through their low point,” Mr Lawless said.
Dean Milton, chief operating officer at the Real Estate Institute of Queensland, said April’s mortgage reprieve had proved “short-lived”.
“We have seen regulatory chaos from state and federal governments, and whiplashing back to another interest rate rise only adds to this pain,” he said.
Indeed, APAC economist Callam Pickering said the RBA board thought economic conditions remained too strong to bring inflation back to target.
He said further rate hikes remained on the horizon, though the central bank must balance this against the rising risk of an economic downturn.
“The key challenge for the RBA is balancing the risks of high inflation against the likelihood that excess tightening plunges the economy into a recession or severe downturn which harms Australian workers,” he said.
Pradeep Philip, head of Deloitte Access Economics, said the RBA was “playing recession roulette” with the economy as it battles high inflation.
“The decision to lift the cash rate by 25 basis points to 3.85 per cent is unnecessary given 10 previous rate hikes are still working their way through the economy,” he said.
“Meanwhile, hundreds of thousands of mortgage holders are still to see their repayments surge as pandemic-era low fixed rates revert to variable, while businesses continue to be squeezed.”
