In order to combat the greatest inflation in twenty years, the Reserve Bank of Australia increased the cash rate by half a percentage point.
Governor Philip Lowe has hinted at additional hikes.
The increase brings the cash rate, which had previously reached a three-year high of 1.35 percent, to a six-year high of 1.85 percent.
This implies that a homeowner paying off an average $600,000 mortgage will need to come up with an extra $169 each month for their mortgage repayment.
Additionally, due to the most recent rise, borrowers will no longer be able to obtain low variable rates of under 3%.
With rate rises in May, June, July, and August, the RBA has now increased rates at its fastest rate since 1994.
For the first time since the Reserve Bank announced a target cash rate in 1990, it has increased rates by 50 basis points at three consecutive sessions.
Dr. Lowe stated in a statement that the ongoing conflict between Russia and Ukraine would make it difficult for the RBA to get inflation back within its two to three percent target any time soon.
He claimed that the path to achieving this balance was difficult and unknown, in part because of developments occurring around the world.
By stating that “the board places a high importance on the return of inflation to the two to three per cent range over time, while keeping the economy on an even keel,” the head of the RBA strongly hinted at future rate increases.
Although it is not on a predetermined course, Dr. Lowe stated that the board “expects to take further measures in the process of normalising monetary conditions during the months ahead.”
The board’s assessment of the forecast for inflation and the labor market, along with the incoming statistics, will determine the magnitude and timing of future interest rate rises.
As unemployment plummeted to a 48-year low of 3.5%, inflation soared to a two-decade high of 6.1% in the year to June.
This was the highest headline inflation—also known as the consumer price index—since 1990 even before the GST was implemented.
Inflation is anticipated by the RBA and Treasury to reach a 32-year high of 7.75 percent later this year and to stay above the RBA target range until 2024.
The newest rate increase, according to Treasurer Jim Chalmers, will be difficult on families.
In light of additional constraints like rising grocery and power prices as well as the expenses of other necessities, he stated, “Families will now have to make increasingly difficult decisions about how to balance the household budget.”
Despite Dr. Lowe frequently stating last year that the cash rate would remain on hold at a record-low of 0.1% until 2024 “at the earliest,” a quick series of rate increases are currently taking place.
Dr. Lowe made a suggestion that the low unemployment rate would cause pressure on wages and benefits “as enterprises fight for workers in the tight labor market.”
The manner in which households spend their money is a significant source of uncertainty, he said.
The opposite is also true; more people are getting employment and working longer hours.
Many households have also amassed sizable financial reserves, and the rate of saving is still greater than it was before the outbreak.
In order to provide borrowers a better understanding of decisions made each month, Warwick McKibbin, a former Reserve Bank board member who served from 2001 to 2011, suggested that the RBA publish the opinions of individual board members, much like the High Court does with justices.
He told Daily Mail Australia, “The discussions around the board should be absolutely open and honest.”
“That offers you more knowledge; there are people who think something different might occur.
If they are credible people, then I have two possible outcomes: what if one is correct, what is my situation?”
The uncertainty simply isn’t conveyed effectively enough: it’s a blend of science and art.
Dr. Lowe’s “qualified statement” regarding keeping the cash rate on hold in a few months of 2021, according to Professor McKibbin, was misunderstood by the media.
He said that the communication was the issue because it wasn’t clear exactly what he intended.
Nobody could have predicted the state of the globe in 2022 back in October.
“They didn’t necessarily have the wrong framework, which is why they got it wrong, but some very large shocks came along, like the war in Ukraine, which really accelerated the supply side shocks.”
The latest Reserve Bank rate hike of 0.5 percentage points, according to RateCity research director Sally Tindall, implies that borrowers will no longer have the choice of a variable mortgage rate below 3%.
Families may reach a breaking point after today’s trip, she warned.
The RBA has a job to perform, and the quicker it completes it, the more likely it is to be successful.
However, for many families, these hikes are beginning to hurt.
The major banks all anticipated an increase in interest rates of 0.5 percentage points and are expected to pass those increases on to customers.
A borrower from the Commonwealth Bank with an average loan amount of $600,000 would have their variable rate increase from 3.39 percent to 3.89 percent, resulting in a $169 increase in their monthly repayments from $2,658 to $2,827.
The RBA is anticipated to raise interest rates by another 50 basis points in September, bringing the cash rate to a seven-year high of 2.35 percent, according to ANZ, Commonwealth Bank, Westpac, and NAB.
Gareth Aird, head of Australian economics at the Commonwealth Bank, however, stated that the Reserve Bank would be hesitant to raise rates considerably above its designated neutral range of 2.5%.
In fact, he said, “we anticipate that the RBA will halt once the cash rate reaches around that level to review the impact that their policy tightening has had on the economy.”
The cash rate will reach 3.35 percent by November, according to ANZ, and by February, according to Westpac.
The cash rate is expected to reach 2.6% by November, according to the Commonwealth Bank, and 2.85% by Melbourne Cup Day, according to NAB.
Despite the current tight labor market, Professor McKibbin proposed an alternative to the traditional two to three percent aim, arguing that it was impracticable during a period of global unrest and would eventually result in higher unemployment.
He declared, “It’s the incorrect objective.
“It works well for managing demand in the economy; if there is a significant increase in demand for some reason, inflation rises, unemployment falls, interest rates are raised, and both of the important factors return to their proper levels.
Now, if there is a supply shock, such as a drought or an external conflict, inflation rises, output declines, and if inflation is your aim, you would hike interest rates, which would exacerbate the output losses.
Instead, he argued for integrating inflation with economic growth and setting a target where both inflation and economic production had to add up to 6%, with the possibility that either may increase or decrease.
When everything returns to normal, “you allow that inflation shock to run through and then you go back to 6% with three percent inflation and three percent output,” he said.