Reserve Bank hands out surprise interest rate hike

·3-min read

Mortgage holders have been struck with another interest rate hike after just a month of relief.

The 0.25 percentage point increase from the Reserve Bank of Australia brings the cash rate to 3.85 per cent, its highest level since April 2012, and further tightening has not been ruled out.

For mortgage holders, the 11 rate rises since May 2022 have driven repayments through the roof.

RateCity analysis shows the hiking cycle has added $1048 to total repayments on a $500,000 debt.

In April, the RBA board opted to leave the cash rate unchanged to allow more time to see how higher rates were playing out.

While the quarterly inflation data revealed a slowdown in inflation, it remained "too high" for the board's comfort.

"Inflation in Australia has passed its peak but at seven per cent is still too high and it will be some time yet before it is back in the target range," RBA governor Philip Lowe said in his statement.

"Given the importance of returning inflation to target within a reasonable time frame, the board judged that a further increase in interest rates was warranted today."

While headline inflation is likely on its way down from 7.8 per cent annual growth in the December quarter, strong services inflation appears to have fed into the case for another hike.

"Services price inflation is still very high and broadly based and the experience overseas points to upside risks," Dr Lowe said.

KPMG chief economist Brendan Rynne said services price inflation was largely being driven by higher wages and Australia was now sitting at the "lower end" of a wage-price spiral.

"The continuation of wages growth around four per cent per annum without a corresponding increase in productivity means these input costs are directly adding to inflationary pressures in a circular fashion," Dr Rynne said.

"It would seem the RBA has recognised this as well and acknowledged that it will struggle to have inflation returning to the target band for at least another two years, even with some further increases in the cash rate."

KPMG economists expect one more hike will be needed to bring inflation down quickly enough, with the large cohort of mortgage holders rolling off low-interest fixed loans anticipated to help by cooling demand organically.

But other economists believe the RBA has lifted rates for the last time.

While the governor said "further tightening of monetary policy may be required", Commonwealth Bank economist Gareth Aird said the RBA's lean towards more hikes had been watered down.

"We have left our central scenario unchanged and see 3.85 per cent as the peak in the cash rate this cycle," he said.

"We continue to look for rate cuts in late 2023 as we believe inflation will fall more quickly than the RBA currently anticipates."

Treasurer Jim Chalmers, who is a week away from handing down his second budget, said the decision served as a pertinent reminder that inflation was the primary challenge facing the economy.

"The priorities in the budget will be responsible cost of living relief that doesn't add to inflation, laying the long-term foundations for future growth and opportunities in our economy and also making our budget and our economy and our people and our country much more resilient to the sorts of global economic uncertainty we've seen in recent times," he said.