RBA’s 12th interest rate hike stuns homeowners and small businesses
Australian mortgage holders and small businesses are reeling after the Reserve Bank of Australia (RBA) elected to raise interest rates for the 12th time in 13 months.
The decision has seen the cash rate climb to 4.1% after the RBA elected to throw in a further 0.25% hike.
The RBA also increased the interest rate paid on exchange settlement balances by 25 basis points to 4%.
Increased burden on homeowners
For mortgage owners it is more financial pain with rates sky-rocketing from a low of 0.1% in May 2022.
It has been estimated that today’s increase will lead to the average Australian borrower paying an additional $15,000 per year in repayments compared to 12 months ago.
For a homeowner with $500,000 owing on their loan monthly repayments will have increased by around $1,134 a month since the interest rate hikes kicked in.
Many analysts believe that borrowers are in for even more pain, with further interest hikes predicted over the coming months unless there is a major swing in inflation numbers.
Impacts on businesses
There are also fears that small businesses may start cutting staff, with their daily costs continuing to rise.
Federal Treasurer, Jim Chalmers, admitted that mortgage holders would find the RBA’s decision hard to understand and it was a difficult day for homeowners.
He also defended the federal government’s recent budget and increases to wages, stating they should not be associated with the RBA decision.
He said that despite the interest rate and inflationary pressures, the government forecasts are that Australia’s economy will undergo a significant slow down over the next 12 to 18 months.
RBA notes inflation falling
In its statement on the latest interest decision, the RBA suggested that Australia’s inflation has passed its peak, but was still too high at 7%.
Concerningly the RBA added it will be some time yet before it is back in its target range.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” RBA Governor Philip Lowe stated.
Mr Lowe said the Board had reacted to recent data suggesting the upside risks to the inflation outlook have increased.
“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
Economy and labour market conditions
According to the RBA, the Australian economy has slowed and conditions in the labour market have eased.
It reported that the unemployment rate had achieved a small rise to 3.7% in April and employment growth has moderated.
However, wages growth has picked up in response to the tight labour market and high inflation.
Adding further to inflation fears, the RBA predicted that public sector wages are expected to pick up further and the annual increase in award wages was higher than it was last year.
“At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” Mr Lowe said.
“The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”
Mr Lowe said further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.
However, any further moves will be related to how the economy and inflation evolve.
“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. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”