‘Difficult to cop’: RBA lifts interest rates to 11-year high of 4.1 per cent

The Reserve Bank has inflicted more pain on the nation’s army of mortgage holders, lifting interest rates to an 11-year high of 4.1 per cent.

Announcing the 0.25 percentage point rise in the official cash rate on Tuesday, bank governor Philip Lowe warned more increases could be necessary, saying while inflation had passed its peak, it was still too high.

On a $600,000 mortgage, Tuesday’s move will add almost $100 to monthly repayments.

It is the 12th increase in rates in 13 board meetings, with the bank tightening monetary policy at the fastest rate since the late 1980s. That period ended in the 1990-91 recession.

Lowe said inflation would take some time to fall back to the bank’s target range of 2-3 per cent.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” he said.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

Treasurer Jim Chalmers said the latest rate rise would be difficult news for many Australians.

“This will make life much harder for people with a mortgage. The Reserve Bank takes these decisions independently and as you know, I do my best not to second guess them,” he said.

“I do expect that there will be a lot of Australians who will find this decision difficult to understand and difficult to cop.”

Lowe said the economy had started to slow and the labour market was easing, but it remained “very tight”.

There had been a pick-up in wage growth, with Lowe noting that public sector wages were likely to lift further while the recent minimum wage increase was higher than last year.

But he also said that at the aggregate level, wages were still consistent with the RBA’s 2-3 per cent inflation target as long as productivity growth lifted.

The largest threat to the economy remained how households responded to the bank’s rate increases.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending,” he said.

“Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances.”

Lowe said the RBA board still wanted to keep the economy “on an even keel”, but noted that achieving that would not be easy.

Chalmers acknowledged it would be difficult for the Reserve Bank to bring inflation down without pushing the economy into a recession.

On Wednesday, the government will release the national accounts figures for the first three months of the year, and Chalmers said he expected it to show a “substantial slowing” of the economy in the next 12-18 months.

“That is the inevitable consequence I think of higher interest rates biting at the same time as the global economy is a precarious place,” Chalmers said.

“The job that the independent Reserve Bank has is to try and get on top of this inflation challenge in our economy without crashing our economy, and we’ve known for some time that that is a difficult path to tread.”

But when asked directly about the risk of a recession, in light of the most aggressive rate hiking cycle since the 1980s, Chalmers said it was not in any Treasury or Reserve Bank forecasts.

CreditorWatch chief economist Anneke Thompson said despite signs of a slowdown in the economy, the Reserve Bank was clearly concerned about the inflation pressures in the economy.

“While consumer demand is definitely dropping overall, non-mortgaged and non-renting households continue to spend up on services, particularly in the tourism, cafes and restaurants and health sectors, making inflation more sticky in these areas of the economy,” she said.

“It remains to be seen if further increases to the cash rate will make enough of a dent in services-side inflation, given these consumers are not impacted by higher interest rates.”