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.”
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.
“A significant source of uncertainty continues to be the outlook for household consumption,” he said.
“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. 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 acknowledged achieving that would not be easy.
“The board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market,” Lowe said.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Ahead of the decision, Treasurer Jim Chalmers rejected claims by the Coalition that last month’s budget was adding to the inflation pressures the Reserve Bank was trying to quell with higher interest rates.
“Our responsible budget was carefully calibrated to ease cost-of-living pressures, address the inflation challenge and invest in a more productive and resilient economy,” he said.
“The governor has already made it clear that the budget is addressing inflation, not adding to it.
“Our inflation challenge is because of global pressures and busted supply chains, which have been neglected for a decade, not because people on the lowest incomes are getting paid too much.”
But shadow treasurer Angus Taylor said the government was adding to the economy’s inflation problems.
“There is enormous pressure on cost of living out there and that means there’s pressure on interest rates and, sadly, we are in a position where the expectations of markets and economists say we’re going to see more pain,” he said.
“I certainly hope these pressures come off. But sadly, we’re seeing a cocktail of policies since the budget that, if anything, are inflationary. That means there’s real pressure for interest rates to go up.”
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.”
More to come
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