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The Reserve Bank of Australia has raised the cash rate by half a percentage point with governor Philip Lowe hinting at further increases to tame the worst inflation in two decades.
The move takes the cash rate to a six-year high of 1.85 per cent – up from a three-year high of 1.35 per cent.
This would see someone paying off an average $600,000 mortgage cop a $169 increase in their monthly mortgage repayments.
The latest increase also means borrowers will no longer be able to get a low variable rate under three per cent.
The RBA has raised rates now in May, June, July and August marking the steepest pace of increases since 1994.
It has raised rates by 50 basis points at three straight meetings, the first time this has occurred since the Reserve Bank published a target cash rate in 1990.
This has taken the cash rate from a three-year high of 1.35 per cent to a six-year high of 1.85 per cent. This would see someone paying off an average $600,000 mortgage cop a $169 increase in their monthly mortgage repayments
In a statement, Dr Lowe said the RBA would struggle to get inflation back within the central bank’s two to three per cent target any time soon, with Russia’s war with Ukraine keeping petrol prices elevated.
‘The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,’ he said.
The RBA chief strongly hinted at more rate rises to come.
‘The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,’ Dr Lowe said.
‘The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.’
Inflation in the year to June surged by a two-decade high of 6.1 per cent as unemployment fell to a 48-year low of 3.5 per cent.
Without the introduction of the GST, this was the steepest headline inflation, also known as the consumer price index, since 1990.
Treasury is expecting inflation to hit a 32-year high of 7.75 per cent later this year and remain outside the RBA target band until 2024.
The Reserve Bank of Australia has raised the cash rate by half a percentage point
Treasurer Jim Chalmers told Parliament the latest rate rise would be hard on families.
‘Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures like higher grocery prices and power prices and the costs of other essentials,’ he said.
The rapid series of rate rises are occurring despite Dr Lowe repeatedly promising last year to keep the cash rate on hold at a record-low of 0.1 per cent until 2024 ‘at the earliest’.
Warwick McKibbin, who sat on the Reserve Bank board from 2001 to 2011, said the RBA should publish the opinions of individual board members, like the High Court does with judges, so borrowers had a better idea of decisions each month.
‘The debates around the board should be completely open and transparent,’ he told Daily Mail Australia.
‘That gives you more information, that there are people out there that believe something else might happen and if they’re credible people, then I’ve got two possible outcomes: what if one’s right, what’s my situation?
‘The uncertainty just isn’t communicated well enough: it’s part science, part art.’
Professor McKibbin said Dr Lowe’s ‘qualified statement’ in some months of 2021 was misrepresented by the media.
‘It wasn’t transparent exactly what he meant and the communication was the problem,’ he said.
‘Back in October, no one would have known what the world would be like in 2022.
‘The reason they got it wrong wasn’t necessarily because they had the wrong framework, it was because some pretty big shocks came along like the war in Ukraine which really propelled the supply side shocks.’
In a statement, Dr Lowe said the RBA would struggle to get inflation back within the central bank’s two to three per cent target any time soon, with Russia’s war with Ukraine keeping petrol prices elevated (pictured are houses in Sydney’s west)
RateCity research director Sally Tindall said the latest 0.5 percentage point increase means borrowers would no longer have the option of a variable rate under three per cent.
‘Today’s hike could be the tipping point for families feeling the heat,’ she said.
The big banks were all expecting a 0.5 percentage point rate rise and are likely to pass on the hikes to consumers.
A borrower with an average $600,000 from the Commonwealth Bank would see their variable rate climb from 3.39 per cent to 3.89 per cent, causing their monthly repayments to rise by $169 from $2,658 to $2,827.
ANZ, Commonwealth Bank, Westpac and NAB are all expecting the RBA to follow up with another 50 basis point rate rise in September, taking the cash rate to a seven-year high of 2.35 per cent.
ANZ is expecting the cash rate to hit 3.35 per cent by November while Westpac is forecasting that occurring by February.
A borrower with an average $600,000 from the Commonwealth Bank would see their variable rate climb from 3.39 per cent to 3.89 per cent, causing their monthly repayments to rise by $169 from $2,658 to $2,827
The Commonwealth Bank is predicting a 2.6 per cent cash rate by November while NAB is forecasting a 2.85 per cent cash rate by Melbourne Cup Day.
Dr Lowe has previously hinted the cash rate would have to hit 2.5 per cent to be in the neutral territory.
Professor McKibbin suggested an alternative to the longstanding two to three per cent target, which he argued was impractical during a time of global turmoil.
He instead advocated combining inflation with economic growth, and having a target where inflation and economic output had to both add up to six per cent, so one could rise and the other could fall.
‘You allow that inflation shock to go through and then when everything’s back to normal, you go back to six per cent with three per cent inflation and three per cent output,’ he said.
$500,000: Up $141 from $2,215 to $2,356
$600,000: Up $169 from $2,658 to $2,827
$700,000: Up $197 from $3,101 to $3,298
$800,000: Up $225 from $3,544 to $3,769
$900,000: Up $253 from $3,987 to $4,240
$1,000,000: Up $281 from $4,430 to $4,711
Increases based on Reserve Bank cash rate rising from 1.35 per cent to 1.85 per cent taking popular Commonwealth Bank variable rate from 3.39 per cent to 3.89 per cent