The Reserve Bank has raised interest rates by an increase of 50 basis points or half a percentage point, bringing the cash rate target to 0.85 percent, well above the expectations of most economists .
If the banks transfer in full, the rate increase will add $ 133 a month on a $ 500,000 loan for 25 years and $ 265 a month on a $ 1 million loan.
In early May, the RBA raised Australia’s official cash rate by 25 basis points from 0.1% to 0.35%.
It marked the first rate hike in 11 years, since November 2010, and forecasts are that the cash rate could reach 2.5 percent by the end of next year.
If that happens, a borrower with a loan balance of $ 500,000 could see his monthly repayments increase by $ 652 a month by Christmas next year.
Announcing the decision, Reserve Bank Governor Philip Lowe said the increase was in response to the fact that “inflation in Australia has risen significantly”.
Annual inflation rose to 5.1% in the March quarter, driven by rising housing construction costs and fuel prices.
Lowe said that although inflation in Australia was lower than in most other advanced economies, it was still “higher than expected”.
Inflation was expected to rise further, he said, but then it would drop back to its target range of 2 to 3 percent next year.
“Higher electricity and gas prices and recent increases in petrol prices mean that inflation is likely to be higher in the short term than expected a month ago,” he said.
“As global supply problems are resolved and commodity prices stabilize, albeit at a high level, inflation is expected to moderate.
“Today’s rise in interest rates will help return inflation to the target over time.”
More rate hikes to come
Dr Lowe said the council’s latest interest rate hike was “another step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic”.
Philip Lowe says the Reserve Bank will likely continue to raise interest rates in the coming months. (ABC News: John Gunn)
“The resilience of the economy and higher inflation make this extraordinary support no longer necessary,” he said.
“Given the current inflationary pressures on the economy and the still very low level of interest rates, the council has decided to move today by 50 basis points.”
He said the Reserve Bank would likely continue to raise rates in the coming months.
“The size and timing of future interest rate hikes will be guided by incoming data and the board’s assessment of the inflation outlook and the labor market,” he said.
“The board is committed to doing whatever it takes to ensure that inflation in Australia returns to its target over time.”
The economy was “resilient,” growing 0.8% in the March quarter and 3.3% during the year.
He noted that “employment has grown a lot” and the unemployment rate is 3.9 percent, which is the lowest rate in almost 50 years.
He said the bank’s trade liaison program continues to point to rising wage growth since low rates in recent years as companies compete for staff in a tight labor market.
But one source of uncertainty about the economic outlook was how household spending is evolving, given the growing pressure on Australian household budgets due to rising cost of living.
He said the council would pay close attention to these factors, as well as the global outlook, “which is still clouded by the war in Ukraine and its effect on energy prices and agricultural commodities.”
Posted 48 minutes, 48 minutes ago, Tuesday, June 7, 2022 at 4:38 AM, updated 13 minutes ago, 13 minutes ago, Tuesday, June 7, 2022 at 5:13 AM