RBA raises interest to 0.85 percent

Homeowners have been dealt another major blow, with the Reserve Bank announcing a “superb” rate hike that no one saw coming.

The Reserve Bank of Australia sent another shockwave by raising official spot interest rates by 50 basis points and taking experts by surprise.

At this afternoon’s RBA meeting in June, the board of directors decided to raise the official cash interest rate to 0.85 percent, bringing it back to its highest level since September 2019 and marking the first consecutive rate hike in 12 years.

It comes after the RBA caught many by surprise last month by raising the spot rate by 25 basis points, from the all-time low of 0.1 percent to 0.35 percent, in the middle of the election.

The unexpected magnitude of the rate hike has sent shockwaves across the country and further evidence that the economy is not doing well.

And evidence from the RBA itself — as well as forecasts from numerous financial experts — indicate that today’s surge will be just the tip of the iceberg.

‘Superb’ increase in Australian police rates

The RBA has once again blindsided financial experts by announcing a so-called “superb” rate hike after its June board meeting.

Until this afternoon, opinions were divided on whether the RBA would announce a 25 or 40 basis point rate hike, but today’s 50 basis point hike really surprised economists.

“Inflation in Australia has risen significantly. While inflation is lower than in most other advanced economies, it is higher than previously expected,” RBA Governor Philip Lowe said in a statement this afternoon.

Global factors, including Covid-related supply chain disruptions and the war in Ukraine, are responsible for much of this rise in inflation. But domestic factors also play a role, with capacity constraints in some sectors and the tight labor market contributing to upward pressure on prices. The flooding earlier this year also affected some prices. “Inflation is expected to rise further, but fall back to the 2-3 percent margin next year. Higher electricity and gas prices and recent increases in gasoline prices mean that short-term inflation is likely to be higher than expected a month ago.”

‘Just a taste of what’s to come’

Meanwhile, experts agree that today’s rate hike is just the tip of the iceberg.

“With inflation at a two-decade high, the RBA will aggressively raise interest rates for the remainder of this year,” APAC economist at Indeed Callam Pickering said in a statement.

“Rate increases in both May and June are just a taste of things to come.

“Whether these rate hikes will work is a trillion dollar question. Australia has imported high inflation from abroad and that is not typically a channel through which the RBA has a huge influence.

Complicating matters further, markets are pricing in a 2.7 percent spot rate toward the end of the year. If the RBA raises rates at a slower pace — which they almost certainly will — then the resulting depreciation will of the Australian dollar exert upward pressure on inflation.”

Meanwhile, treasurer Jim Chalmers also weighed in on the rate hike – the first under the new Labor government – and stated it was “difficult news for homeowners” who were already feeling the pinch.

In a press conference held shortly after the RBA bombing, Mr Chalmers said the rate hike would stretch household budgets even further at a time when the country was facing a series of economic challenges.

“We have an incredibly difficult challenge of combinations,” he said this afternoon.

“High and soaring inflation, rising interest rates, falling real wages at a time when our ability to respond to these challenges is limited by the fact that the budget is absolutely loaded with liberal debt.”

Brendan Rynne, KPMG’s chief economist, said the RBA’s decision to “go big” with a 0.5 percent rate hike shows its “desire to get interest rates as neutral as possible as soon as possible.”

“It shows that the RBA believes inflation risks are firmly on the upside,” he said.

“Going big has the advantage of clearly reinforcing the message that the central bank wants to mitigate inflation risk — especially that of anchoring inflation — by raising rates by a larger-than-average amount.”

And Compare the Market’s digital banking expert David Ruddiman also agreed it was a tough situation for the nation.

“Some homeowners haven’t seen rate hikes of this magnitude since they first took out their mortgage,” Mr Ruddiman said.

“Unbridled inflationary pressures, recent wage growth and record low unemployment made an increase of 50 basis points to a 0.85 percent spot rate a logical position given the current circumstances, but significant increases will be needed in the coming months.

“Of course, while this will help bring inflation back under control, it will inevitably lead to another big surge in monthly mortgage payments – more than we’ve seen in nearly a quarter of a century.

“In the current economic environment, this is like trying to arm wrestle an octopus.”

‘Much worse’: Australia on the brink

In this month’s comparison site Finder’s RBA Cash Rate Survey, 86 percent of economists and pundits expected an increase, while 28 percent believed at least two increases in cash interest rates would occur before the end of the year.

But Graham Cooke, head of consumer research at Finder, said the Australians were already feeling the pinch.

“The economy is on a precipice and some families are really starting to struggle financially with the cost of living – and for people with a home loan it could get a lot worse,” he said.

“Raising cash rates is good news for savers and will help slow Australia’s runaway property market, but those with a home loan are lining up for several further cost hikes.”

Read related topics:Cost of livingReserve bank

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