This article is from the Australian Property Journal archive
THE Reserve Bank board has shocked the nation and resumed hiking interest rates, again deciding that inflation remained too high to not take action, and its governor Philip Lowe warned yet further rises may be on the way.
Financial markets had factored in a near 100% chance of another hold after a pause in April that followed 10 consecutive hikes, taking the cash rate from 0.1% to 3.6%
The board yesterday lifted it by a further 0.25% to 3.85%.
In a statement, RBA governor Philip Lowe said inflation in Australia has passed its peak – it came back down to 7% in the March quarter from 7.8% in December – “but at 7% is still too high and it will be some time yet before it is back in the target range” of 2 to 3%.
“The board’s priority remains to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy, Lowe said.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”
“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”
AMP Capital chief economist Shane Oliver said the decision to hike rates again still leaves the RBA “more cautious in raising rates than other comparable central banks, arguably reflecting an allowance for the faster flow-through of monetary tightening to households in Australia than in other countries, and the RBA’s relatively greater focus on maintaining full employment and its desire to ‘keep the economy on an even keel’.”
Lowe said the board held interest rates steady last month to “provide additional time to assess the state of the economy and the outlook”. The RBA’s forecast remains that inflation will 4.5% in 2023 and 3% in mid-2025.
The latest move would add nearly another $78 a month to repayments on a $500,000 mortgage, according to RateCity, and making for 1,058 per month more than when rates were at their historic low. The Reserve Bank had offered guidance that the official rate would stay at 0.1% until 2024, and the resulting anger from those who took the board at its word and took out a mortgage, and an appearance from the Senate Economics Committee, prompted a sensational apology from Lowe.
“By reverting back to a rate hike, the RBA is hammering home the message it is prepared to do what it takes to rein in inflation,” said RateCity research director Sally Tindal.
“After a month’s reprieve borrowers were still catching up to the rate hikes rather than catching their breath. To have another one piled on top will feel like another kick in the guts.”
Treasurer Jim Chalmers said, “This is a really difficult decision for a lot of Australians who are already under the pump,”
“This is a reminder that inflation remains the primary challenge in our economy.
He also said it is a “reminder of the difficult economic conditions” in which Labor will be framing its second budget, to be handed down on Tuesday.
ANZ reverted its forecast for the peak of the cycle back to 4.1%, expecting a 25 basis point rise in August, given its “concerns about the stickiness of services and non-tradables price inflation, the robustness in the labour market and the business sector”.
The hike comes a fortnight after an independent review concluded that the RBA board should no longer set interest rates. Chalmers agreed in principle all the review’s recommendations
