The Reserve Bank has increased interest rates for the first time in more than 11 years, with a 25-basis-point hike taking the cash rate target to 0.35 per cent.
Key points:
- The Reserve Bank’s 25-basis-point increase to the cash rate target takes it to 0.35 per cent
- The RBA governor warns that getting inflation under control “will require a further lift in interest rates”
- Financial markets and economists expect the next official rate rise to occur in June
If passed on in full by banks, the rate rise will add $65 a month to repayments on a $500,000 mortgage, and double that on a million-dollar loan.
The move came as little surprise to financial traders, who had priced in around a two-thirds probability of the RBA raising rates this month.
Reserve Bank governor Philip Lowe said the combination of recent very high inflation numbers and evidence that workers were starting to get bigger wage increases as a result of a low 4 per cent unemployment rate meant that the time was right for “normalising” interest rates away from emergency lows.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he noted in his post-meeting statement.
“This will require a further lift in interest rates over the period ahead.”
Mr Lowe will hold a press conference to answer questions about the decision at 4pm AEST.
Markets are pricing in the certainty of another rise in June, with bets split between another 25-basis-point hike and an even bigger increase — the implied cash rate after the RBA’s June 7 meeting is 0.7 per cent.
Before today’s meeting, economists at the major banks were deeply divided about how high interest rates would rise — from a 1.25 per cent forecast at the Commonwealth Bank up to more than 3 per cent tipped by ANZ.
Westpac was somewhere in the middle, tipping a 2 per cent cash rate sometime next year.
RateCity estimates that would add $512 a month to a $500,000 mortgage, and double that — $1,025 a month — to a million-dollar loan.
Cost of living hit
But the Reserve Bank has now dramatically increased its inflation forecasts.
It is tipping consumer prices to rise as much as 6 per cent this year, and still be growing at an annual rate of 3 per cent in 2024.
ANZ senior economist Adelaide Timbrell said that means more rate rises will be required.
“They’re going to keep raising the interest rate to make businesses think twice about investing, about hiring workers and about spending money,” she said.Why will the RBA raise rates?The Reserve Bank is likely to start raising interest rates next Tuesday. But why would it add increased costs at a time when Australians are struggling with a surging cost of living? Michael Janda explains the economics behind it.Read more
“They’re also going to make consumers think twice about spending money.
“What this does is it slows down the spiral effect, where lots of people buy stuff at the same time, and then that stuff gets much more expensive over time.
“So the Reserve Bank is basically increasing the cost of borrowing money to decrease the speed of the cost of living going up.”
But, in the short term, it is a cost-of-living double-whammy for borrowers like Bashir Naim.
He took out a variable mortgage earlier this year to build a new home for his family in Sydney’s west.
“The last few years, all you hear about is rates dropping, the government encouraging people to buy and the housing market booming. Now it’s sort of the opposite,” he said.
“From our perspective, with the cost of building being so high, it hasn’t come at a good time.”Staying afloatKeeping up with your mortgage repayments might soon get harder.Read more
Mr Naim said his family should be able to cope with moderate rate rises, but they might have to cut back on some of their non-essential shopping.
“If they go up dramatically, I think there will be a lot people in trouble, not only us,” he said.
“We’re probably in not a bad position, but it’s scary not knowing where the future is heading.”
Savers rejoice
But not everyone is worried.
Retiree Grant Agnew is currently receiving just 1.09 per cent interest on his savings. He is one of around two-thirds of the population without a mortgage who are quite happy to see interest rates rise from record lows.
“I get no return on my money. Other people are allowed to borrow it, but I’m not allowed to get anything from them for it,” he told The Business.
“I want the interest rates to go up so that I can get a decent return on my money.
“I want them to go up over 20 per cent, like they did three times in the 1980s. Life was beautiful, money fell from the sky.”
By business reporters Michael Janda and Emilia Terzon
