• Aron Cardona - Mortgage Broker Northern Beaches

RBA Increase Rates Again

The Reserve Bank has increased interest rates with a 50-basis-points or half a percentage point hike, taking the cash rate target to 0.85 per cent.

If passed on in full by the banks, the rate rise will add $133 a month on a loan worth $500,000 over 25 years, and $265 a month on a loan worth $1 million.

In early May, the RBA lifted Australia's official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent.

It marked the first rate rise in 11 years — since November 2010 — and forecasts are that the cash rate could hit 2.5 per cent by the end of next year.

In announcing the decision, Reserve Bank governor Philip Lowe said the rise was in response to the fact that "inflation in Australia has increased significantly".

Annual inflation increased to 5.1 per cent in the March quarter, driven by higher housing construction costs and fuel prices.

Dr Lowe said while inflation in Australia was lower than in most other advanced economies, it was still "higher than earlier expected".

Inflation was expected to increase further, he said, but would then decline back towards its 2 to 3 per cent target range by next year.

"Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago," he said.

"As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.

"Today's increase in interest rates will assist with the return of inflation to target over time."

Dr Lowe said the latest increase in interest rates by the board was "a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic".

"The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed," he said.

"Given the current inflation pressures in the economy, and the still very low level of interest rates, the board decided to move by 50 basis points today."

He said the Reserve Bank would likely keep raising rates over the months ahead.

"The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market," he said.

"The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time."

The economy was "resilient", growing by 0.8 per cent in the March quarter and 3.3 per cent over the year.

He noted that "employment has grown significantly" and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years.

He said the bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.

But one source of uncertainty about the economic outlook was how household spending evolves, given the increasing pressure on Australian households' budgets from the rising cost of living.

"Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending," Dr Lowe noted.

"The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers."

He said the board would be paying close attention to these factors as well as the global outlook, "which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities".

"Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks withdraw monetary policy support in response to broad-based inflation," he said.

"There are also ongoing uncertainties related to COVID, especially in China."

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