In an attempt to curb inflation, the Reserve Bank of Australia (RBA) has raised the cash rate by 25 basis points, making it 4.1%, the highest level in 11 years. This decision marks the 12th interest rate hike in just over a year. While economists and markets had slightly anticipated no change this month, the RBA deemed the risk of prolonged high inflation to outweigh the potential financial strain on households and businesses.
RBA Governor Philip Lowe stated that although inflation in Australia has already peaked, it remains too high at 7%, and it will take time to bring it back within the target range. The increase in interest rates aims to instill greater confidence that inflation will return to the desired level within a reasonable timeframe. Lowe emphasized the possibility of further tightening of monetary policy depending on the evolution of the economy and inflation.
Lowe reiterated the RBA’s commitment to returning inflation to the target range, stating that the board remains resolute and will take necessary measures to achieve this goal. As of April, underlying inflation stood at an annual rate of 6.5%, well above the RBA’s target range of 2% to 3%. Recent data indicated increased upside risks to the inflation outlook, particularly due to persistent high services price inflation and rising unit labor costs coupled with subdued productivity growth.
The decision to raise interest rates has implications for mortgage holders, as each 25 basis point increase adds approximately $15 to monthly mortgage payments for every $100,000 borrowed. Since the RBA began increasing rates in May of the previous year, the cumulative effect of the 400 basis points of increases has led to an estimated $1,134 rise in monthly payments for a typical $500,000, 25-year owner-occupier loan, according to Rate City estimates.
The Australian dollar experienced a surge following the news, gaining about half a US cent and trading above 66.7 US cents. Conversely, stock markets witnessed a decline, with the ASX200 benchmark index falling more than 1%.
Treasurer Jim Chalmers distanced the federal government from the interest rate hike, clarifying that it was not a result of the budget and stating that the battle against inflation is far from over. Chalmers emphasized that the rise was driven by the persistence of inflation in the economy, particularly in areas targeted by the budget, such as rent, energy, and healthcare costs.
ANZ, which had previously predicted a peak cash rate of 4.35%, stated that this forecast might need to be revised higher. ANZ’s head of Australian economics, Adam Boyton, anticipates another 25 basis point increase from the RBA, most likely in August, considering factors such as productivity outlook, unit labor costs, and sticky services inflation. Boyton suggested that the RBA might need to implement more than one additional rate hike, and risks are skewed toward a greater number of increases.
The ACTU secretary, Sally McManus, criticized the RBA’s decision, accusing it of burdening consumers and punishing those who are not responsible for the current cost-of-living crisis. McManus argued that the action would put more pressure on those who cannot afford it and contribute to increased unemployment. On the other hand, the Australian Chamber of Commerce and Industry attributed the rate rise to the ACTU’s wages claim, stating that wages growth without productivity gains could fuel inflationary expectations and pressures.
Lowe’s statement acknowledged a slight increase in the jobless rate to 3.7% in April, alongside moderated employment growth. Although labor shortages have eased, job vacancies and advertisements remain at high levels. The RBA anticipates a further pickup in public sector wage growth and noted higher annual increases in award wages compared to the previous year.