RBA raises cash rate to 4.35% in bid to cool inflation

The Reserve Bank of Australia today delivered the news that stopped a nation — for the first time in five months, it has hiked the official cash rate by a quarter of a point to 4.35%.

Following its Melbourne Cup Day board meeting, the bank announced the latest in a string of hikes which have taken the cash rate from a record low of 0.1% at the start of May last year, to its highest level since November 2011.

RBA governor Michele Bullock said the news had been a long time coming.

“The board has judged that higher interest rates were working to establish a more sustainable balance between supply and demand in the economy [and] had noted that the impact of the more recent rate rises would continue to flow through,” she said.

“It had therefore decided it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest rates so far… in particular, the board indicated it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”

Fresh pain

While the latest increase had been anticipated by economists and financial markets, it is expected to deliver fresh pain to the average Australian household ahead of Christmas.

If passed on in full by the banks, the rates rise will add $15 to home loan repayments on every $100,000 borrowed for those on a variable rate.

According to financial comparison website Canstar, this translates to $101 per month on an average $600,000 home loan.

Since last May, the same repayments have risen by $1,461 a month.

Burden of rising rates

Ms Bullock acknowledged that the burden of rising interest rates was being felt unevenly across the community, which created risks for the economic outlook.

“There are uncertainties regarding the lags in the effect of monetary policy and how [business] pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight,” she said.

“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.”

Inflation outlook

Ms Bullock warned the bank would not hesitate to push rates higher if the inflation outlook worsened.

“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks,” she said.

“The board will continue to pay close attention to developments in the global economy, trends in domestic demand and the outlook for inflation and the labour market… it remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Target band

With high inflation being flagged as “difficult for everyone”, Ms Bullock said the RBA wanted to return to its target band of between 2% and 3% by the end of 2025.

“High inflation damages the functioning of the economy… it erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality,” she said.

“And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment… to date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.”