The Reserve Bank of Australia surprised experts and homeowners by raising interest rates by 0.25 percentage point, pushing cash rates to an 11-year high of 3.85 percent.
The move – the 11th rate hike in the past year – goes against financial markets, which had almost unanimously predicted that the RBA would leave rates on hold.
In a further shock to borrowers, the RBA has also left open the possibility of further rate hikes, with RBA Governor Philip Lowe describing inflation as still too high at 7 percent in March.
That’s lower than December’s 32-year high of 7.8 percent, but the RBA’s target range for inflation is between 2 and 3 percent.
In a statement, Dr Lowe said: ‘Inflation in Australia is past its peak, but at 7 per cent it is still too high and will take some time to get back into target range.’
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The Reserve Bank of Australia surprised the experts by raising interest rates by 0.25 percentage point, bringing the spot rate to 3.85 percent
The RBA contradicted predictions from Australia’s major banks that rate hikes are over.
“Some further monetary policy tightening may be needed to ensure that inflation returns to target within a reasonable timeframe, but that will depend on how the economy and inflation evolve,” said Dr Lowe.
The latest increase means that a borrower with an average $600,000 mortgage will see their monthly repayments increase by $95 to $3,555, up from $3,460.
That’s based on a variable rate from the Commonwealth Bank rising 25 basis points to 5.89 percent, up from 5.64 percent.
The 30-day interbank futures market had erroneously predicted an interest rate break and spot rates peaked at 3.6 percent following the rate hike in March.
In a Bloomberg survey of 30 analysts, 21 analysts expected no change in the cash rate and only nine predicted a rate hike of 25 basis points.
Financial markets had seen a rate hike as a 12 percent chance.
The Commonwealth Bank, Australia’s largest mortgage lender, had correctly predicted a hike for May, but said it would be the last in this cycle of rate hikes.
While inflation eased to 7 percent in March, down from a December high of 7.8 percent in 32 years, RBA Governor Philip Lowe (pictured) said it was still too high, well above the central government’s target. bank from 2 to 3 percent
Gareth Aird, Commonwealth Bank’s head of Australia’s economy, said the Reserve Bank was now more inclined to leave interest rates unchanged than to raise them.
“We would characterize this shift in attitude as the board now having a slight tightening,” he said.
“If inflation and labor market data move in line with or weaker than the RBA’s forecasts, we don’t think the board will raise cash rates again in this cycle.”
Westpac, NAB and ANZ had predicted a pause, but of those three, ANZ predicted another rate hike in August.
The 11th rate hike since May 2022 means borrowers have endured the harshest pace of monetary policy tightening since the target rate era began in January 1990.
The 3.75 percentage point increase in a year is the most dramatic since 1989, in the era of 18 percent interbank interest rates.
The RBA expects inflation to remain above the target of two to three percent through mid-2025.
“High inflation makes people’s lives difficult and harms the functioning of the economy,” said Dr Lowe.
And if high inflation were to take root in people’s expectations, it would be very expensive to reduce later, with even higher interest rates and a bigger rise in unemployment.
“Today’s further interest rate adjustment will help with that.”
Treasurer Jim Chalmers, who will submit his second budget next Tuesday, said the latest rate hike would be difficult for borrowers.
“This is a very difficult decision for many Australians under the pump,” he said.
“This reminds us that inflation remains the main challenge in our economy.”
The Treasury expects Australia’s net annual immigration rate to reach a record 400,000 in 2022-23, a level significantly above the October budget forecast of 235,000 permanent and long-term overseas arrivals (pictured is Wynyard railway station in Sydney)
The Treasury expects Australia’s net annual immigration rate to reach a record 400,000 in 2022-23, a level significantly above the October budget forecast of 235,000 permanent and long-term overseas arrivals.
With 315,000 expected in 2023-24, that equates to approximately 715,000 new entrants over two fiscal years.
Dr. Chalmers said the 718,000 migrants expected in 2022-23 and 2023-24 were not part of a government target when asked about the effect on inflation.
“First of all, it is important to remember that the substantial increase in net foreign migration is not a number chosen by the government,” he said.
“That’s not a number that the government nominates or a target that the government nominates.
“The reason we expect 718,000 over a two-year net overseas migration is because the students have come back quickly and the long-term tourists have come back quickly and fewer Australians are deciding to go abroad to work.”
AMP chief economist Shane Oliver said strong population growth meant inflation could take longer to moderate, potentially leading to more increases from the Reserve Bank of Australia.
“The risk of more rate hikes remains high given still high inflation, upside risks to wages and RBA concerns that very strong population growth will add to inflation,” he said.
KPMG chief economist Brendan Rynne said high services inflation driven by wage growth was now the main driver of the price pressures that led to this latest rate hike.
“There was an acknowledgment in Governor Lowe’s statement that inflation is now driven by services price inflation rather than commodity price inflation, which is largely driven by higher wages,” he said.
