Reserve Bank of Australia hikes cash rate by a jumbo 50 basis points to 0.85 per cent

The Reserve Bank has shocked the market with the size of its second straight interest rate hike. Here’s what it means for borrowers and renters.

The Reserve Bank of Australia has again shocked the market with a jumbo a 50 basis point rate hike to 0.85 per cent.

Governor Philip Lowe on Tuesday announced a second super-sized hike in five weeks as the RBA continues to wean the country off the emergency borrowing settings which nursed the economy through the pandemic.

The RBA was widely expected to announce its first back-to-back hike in 12 years to quell the inflationary pressures pushing up the cost of food, fuel and electricity.

The Reserve Bank of Australia was widely expected to hike the cash rate on Tuesday and add to borrowers’ mortgage stress. Picture: Gaye Gerard / NCA Newswire.

The only question remaining was how hard governor Dr Lowe and his board were prepared to go, with economists’ predictions mostly split between a rise of 25 or 40 basis points.

Some had envisioned a 50 basis point hike, but the biggest single rate hike since the year 2000 still came as a surprise.

The Australian sharemarket plunged by as much as 1.7 per cent on the news while Aussie dollar briefly jumped to 72.20 US cents.

In his monthly statement, Dr Lowe acknowledged the worrying strength of inflation as the driver behind the hike, but also pointed to a strong Australian economy, a solid labour market and an upswing in business investment as reasons to be positive.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed,” Dr Lowe said.

He did concede rising electricity and gas prices and recent increases in petrol mean, in the near term, inflation would likely to be higher than was expected a month ago.

However, “Today‘s increase in interest rates will assist with the return of inflation to target over time.”

BIS Oxford Economics’ head of macroforecasting, Sean Langcake, said the move signals the RBA was placing a much greater weight on getting inflation back to the target range, and that it is satisfied the labour market recovery will withstand higher rates.

“They have identified slower household consumption growth due to faster inflation and higher interest rates as the key risk to the outlook – faster rate rises add to this downside risk,” Mr Langcake said.

The RBA board is engaged in a delicate balancing act which requires it move fast enough to get inflation under control, without smothering the economy.

Last month it delivered the first interest rate rise in more than 11 years when it hiked from 0.1 per cent to 0.35 per cent, right in the middle of the federal election campaign.

That shift was stronger than was anticipated and once again Martin Place has put its foot down.

RBA Governor Philip Lowe has a difficult task of moving fast enough to get inflation under control without smothering the economy. Picture: NCA NewsWire / Gary Ramage

Tuesday’s move continues what is expected to be an extended cycle of rate hikes over the coming months which, while addressing consumer prices, will also drive up mortgage costs.

Many also expect borrowers to pass some of this stress onto people renting their homes.

“While the rise in monthly repayments this month is relatively moderate, homeowners need to ready themselves for sizeable hikes in the months to come,” RateCity.com.au research director Sally Tindall said

“These rate hikes aren’t going to magically cure Australia’s inflation woes. The RBA will need to hike again, potentially as early as next month and from there they could continue to come thick and fast to get inflation under control.

Improving cost-of-living has been the focal point of the Australian political landscape for months now and Treasurer Jim Chalmers on Tuesday warned the situation would get “worse before it gets better”.

“There is no point mincing words about that,” Mr Chalmers said.

“Our job as the government is to make sure that after some of this near-term cost-of-living relief runs out, that it is replaced by responsible long-term sustainable cost-of-living relief in areas like medicines and childcare, getting power bills down over time and getting real wages moving again.”

Dr Lowe said one source of uncertainty about the economic outlook was household spending, and how it will hold up.

The RBA board will no doubt be paying close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities. Picture: Gaye Gerard / NCA Newswire.

He noted housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending.

“The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers,” Dr Lowe said.

“While the central scenario is for strong household consumption growth this year, the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy.”

The board will also no doubt be paying close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities.

There are also ongoing uncertainties related to Covid-19, especially in China.

Originally published as Reserve Bank of Australia hikes cash rate by a jumbo 50 basis points to 0.85 per cent