Reserve Bank lifts rates by jumbo 0.5pc amid worsening inflation woes

The RBA warns more large hikes are on the way, as homeowners face hundreds of dollars more in monthly mortgage repayments.

The Reserve Bank has warned more large interest rate hikes are on the way after delivering the biggest single increase in two decades, leaving homeowners facing hundreds of dollars more in monthly mortgage repayments.

RBA governor Philip Lowe ­signalled a new-found sense of ­urgency to return to “normal” monetary policy settings as inflation rises faster than previously anticipated, lifting the cash rate by 50 basis points to 0.85 per cent.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” Dr Lowe said.

Westpac was the first major bank to respond to the double Reserve Bank hike, announcing on Tuesday night it would pass on the full, 50-basis-point increase to new an existing variable home-loan customers from June 21.

The higher-than-expected rate rise sent shockwaves through ­financial markets, with the benchmark S&P/ASX 200 quickly dropping by 100 points following the announcement on Tuesday afternoon, before ending the day 110 points, or 1.5 per cent, lower at 7096 points.

Economists warned that the rate hikes would slow down economic growth and declared the RBA had “radically shifted gears”, as they pencilled in another 0.5 percentage point rise at the next meeting in July and predicted rates could now climb as high as 2.1 per cent by the end of the year.

Major lenders are expected to pass on Tuesday’s rise in full, adding $200 a month for a household with a $750,000 mortgage.

Including last month’s 0.25 percentage point rate rise, the monthly interest bill for such a household would be $300 higher than before the new rate hike cycle. A further 0.5 percentage point hike in July would bring that additional interest burden to $500.

Jim Chalmers said that although Australians had expected higher interest rates to be announced, “that doesn’t make this news any less difficult”.

“This will be very difficult news for all of those Australians who are already facing the skyrocketing cost of living,” the Treasurer said.

“Today’s decision, in addition to the pressure it will put on family budgets, will also make it more ­expensive for the commonwealth government to service that trillion dollars of debt.”

However Dr Chalmers later told Sky News he did not expect the economy to fall into recession.

After campaigning on cost-of living issues before the election, Dr Chalmers said it was “within our reach to strengthen our ­economy and have a better future, but first we need to navigate together this high and rising inflation, and the interest rate rises that accompany it”.

“We need to be honest and upfront with the Australian people about the nature, the severity, the magnitude of this inflation challenge that we confront,” he said.

“The Albanese Labor government doesn’t underestimate the serious combination of challenges we have inherited. We will do what we can to alleviate the pressure on Australians who are facing the worst combination of price pressures in their economy.”

A more aggressive rate hike cycle is likely to weigh further on property prices, which have already begun to decline in major markets such as Melbourne and Sydney.

As cost-of-living pressures intensify, ANZ’s weekly consumer confidence gauge dropped a hefty 4 per cent to its lowest level since August 2020, and to around the depths of the GFC in 2008. In a statement accompanying the surprise RBA decision – most analysts had predicted a move of 0.25 or 0.4 percentage points – Dr Lowe said: “Today’s increase in ­interest rates by the board is a ­further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.

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

Dr Lowe said inflation had increased significantly and the board expected to take further steps “in the process of normalising monetary conditions in Australia over the months ahead”.

It was the first time since February 2000 that the RBA board had increased its cash rate target by more than 0.25 percentage points, and left the key policy rate above the 0.75 per cent rate leading into the pandemic. Whereas the RBA waited three months after its first rate rise in late 1999 for the previous 50-basis-points rise, this time it moved one month after the first rise in the current cycle.

Dr Lowe flagged that further outsized rate hikes were on the table. “The size and timing of ­future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he said.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Dr Lowe offered the prospect of some relief from ramping cost-of-living pressures, saying that “as the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate”.

Westpac consumer and business banking chief executive Chris De Bruin said customers had managed their finances carefully during the pandemic, with many putting more funds aside in their savings and offsets accounts.

“This means the majority of our customers are ahead on mortgage repayments and have a buffer available to help them manage an interest-rate increase,” Mr de Bruin said.

There was better news for ­savers, with Westpac introducing a 12-month term deposit rate of 2.25 per cent.

CBA head of Australian economics Gareth Aird said Dr Lowe’s statement implied a new-found sense of urgency and he expected the RBA to deliver another 0.5 percentage point hike in July. Rates were now likely reach 2.1 per cent by December.

“The RBA Board has radically shifted gear today,” Mr Aird said, and this new, more aggressive approach meant “the economy is now likely to slow quite materially as we approach the end of 2022”.

Westpac chief economist Bill Evans also predicted a second double rate hike at the next RBA board meeting, with rates reaching 2.1 per cent this year.

Dr Lowe has previously suggested the cash rate could reach 1.75 per cent by the end of the year.

The RBA governor said that while the Australian economy was resilient, “one source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households’ budgets from higher inflation”.

He also revealed the central bank was 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”.

“Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks withdraw monetary policy support in response to broadbased inflation,” Dr Lowe said. “There are also ongoing uncertainties related to Covid, especially in China.”

Additional reporting: Richard Gluyas

Originally published as Reserve Bank lifts rates by jumbo 0.5pc amid worsening inflation woes