Australian households will be forced to endure a 12th hike in interest rates after the Reserve Bank moved to push up mortgage bills in June.
The cash rate target will rise from 3.85 per cent to 4.1 per cent, RBA governor Philip Lowe said, amid fears inflation will prove too stubborn.
The move will add another $76 to monthly repayments on a typical $500,000, 25-year home loan, according to RateCity, bringing the total squeeze on household budgets to more than $1100 since rises began in May 2022.
Dr Lowe said that while inflation had passed its peak, it remained too high and higher rates would give central bankers more confidence that price growth will fall back to target by mid-2025.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable time frame,” he said.
The RBA has signalled particular concern about inflation for services – namely essentials such as energy and rent – and that rising wages in 2023 could be inflationary if unmatched by higher productivity growth.
“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas,” Dr Lowe said.
“Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
Treasurer Jim Chalmers reacted to the rate hike by rejecting suggestions from the federal opposition that the budget was to blame.
He said many Australians would find the June hike “difficult to understand”.
“This rate rise today is not because of the budget, and it’s not because people on the minimum wage are being paid too much, and we should be really clear about that,” Dr Chalmers said in Canberra.
“This rate rise today is because inflation is more persistent in our economy than any of us would like, particularly in those areas that the budget has been carefully calibrated to address, whether it’s rent, whether it’s energy, whether it’s out-of-pocket health costs.”
Dr Chalmers said the Reserve Bank would be able to explain its decision.
“There will be a lot of Australians who find this decision difficult to understand, and difficult to cop,” he said.
“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time, of opportunities to explain and defend the decision that they’ve taken today.“
Experts were split on whether the RBA would hike on Tuesday. Some expected a pause in the rates cycle after a series of economic figures showed demand slowing across Australia.
But other economists who tipped a raise had argued the central bank would be too concerned about its inflation reduction plan being derailed by fast-rising prices for essentials such as energy and rent.
Indeed APAC economist Callam Pickering said the June jump was “inevitable” amid fears inflation could be more stubborn than expected.
“The RBA is particularly concerned about the stickiness of inflation, particularly in the service sector,” he said.
“Domestic sources of inflation appear to be holding up, even as foreign sources of inflation start to subside.
“If high inflation becomes entrenched in expectations then it will require aggressive hiking – above and beyond what we have seen thus far – to contain.”
The official cash rate target has now increased more than 4 percentage points since from a record-low 0.1 per cent, with all of the hikes coming in the past 13 months.
Households are clearly struggling under the weight of the increases, with Roy Morgan estimates showing more than 1.4 million home owners were at risk of mortgage stress moving into June.
Another 30,000 families will become at risk due to Tuesday’s increase, Roy Morgan has claimed.
Dr Lowe, who has repeatedly acknowledged the financial toll of higher rates on families, said on Tuesday that more rate increases may yet be needed to curb inflation by mid-2025.
But they are not inevitable, with crucial calls in July and August to be driven by incoming data.
“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,” Dr Lowe said.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
