The Reserve Bank of Australia has announced that it will once again raise the cash rate, pushing interest rates to their highest level in over a decade. The 12th rate rise in a little over a year sees the cash rate climb to 4.1%.
“At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.10%,” RBA Governor Phillip Lowe said in a statement.
The decision, made today at the Reserve Bank following the monthly interest rate meeting, will see Aussies paying the highest repayment burden on their mortgages in history. The .25% increase will mean the average earner is spending a quarter of their post-tax salary on mortgage payments, a 50% increase on pre-pandemic levels.
Experts were divided on whether the RBA would increase the cash rate again today following last month’s rise. Only a third of economists polled by Bloomberg believed the RBA would increase the rate, but the ASX seemed to believe it would after a rocky few days of trading.
Following 10 successive increases since May of last year, off the back of a 0.1% COVID-induced low, Aussie mortgage holders were given a brief break in April as the Reserve Bank elected to pause its rapid increase in the cash rate.
They then hit the restart button on those raises last month, citing “still too high” inflation of 6.8%, driving the cash rate up by another 25 basis points to 3.85%.
The latest inflation figures, updated in May, indicate that inflation dropped to 6.3% in March but then increased back to 6.8% in April. With property prices continuing to rise, along with soaring rental leases, inflation looks to be headed in the wrong direction for the RBA.
“Inflation in Australia has passed its peak, but at 7% is still too high, and it will be some time yet before it is back in the target range,” Lowe said.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”
The cash rate is the rate at which the Reserve Bank lends to commercial banks and is almost always passed on to lenders via interest rate rises on mortgages. The current rate is the highest Australia has seen since 2012 and today’s increase is expected to put further pressure on mortgage holders.
The RBA had previously said the April pause had given them time to properly assess the economic situation, which they found to be in need of further tightening. After further consideration this month, they have said that more still needs to be done
“High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality,” Lowe said.
“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
With the cash rate now sitting at 4.1%, the average $585,101 mortgage in Australia will have seen repayments rise by $1,320 per month since May of last year, including this latest jump.
Even those who locked in the lowest rate available before the hikes, of 1.7%, will now be paying some $3,396 per month. This 25 basis point raise will add a further $92 per month to the average mortgage.
The increase in the cash rate is designed to put a dent in the spending power of consumers in a bid to curb inflationary pressures. The tactic does seem to have been somewhat working so far, or at least there’s a correlation between the two.
Inflation appears to have peaked in December of last year at 7.8%, dropping to 6.3% in March. However, the April bounceback appears to have spooked the RBA as inflation is still at levels the country hasn’t seen for decades and is not dropping fast enough.
“The Board is still seeking to keep the economy on an even keel as inflation returns to the 2 – 3% target range, but the path to achieving a soft landing remains a narrow one,” Lowe said, warning that further increases are not off the table.
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