RBA board considering further rate hikes as cash rate hits 11-year-high

A coy statement could have the Reserve Bank boss sweating about his future after he handed down the 12th interest rate hike in 13 months.

Reserve Bank boss Philip Lowe has warned Australians to brace for further interest rate hikes in a fresh blow to households already struggling with the rising cost of living.

The federal government called on the central bank governor to explain why the board raised the cash rate to 4.10 per cent, its highest level since 2012, moments after the decision was handed down.

But Treasurer Jim Chalmers was quick to brush aside suggestion a push for higher wages and the recent federal budget was behind the shock rate call.

“I do expect that there’ll be a lot of Australians who will find this decision difficult to understand and difficult to cop,” he told reporters in Canberra.

Dr Lowe said inflation remained too high. Picture: NCA NewsWire / Martin Ollman

“(The RBA have) also made it clear that they don’t see a wage price spiral in the economy so this rate rise today is not because of the budget and it’s not because people on the minimum wage are being paid too much.”

The Treasurer is currently weighing up whether to extend Dr Lowe’s term when it ends in September.

Asked if the Tuesday’s decision had an impact on this thinking, Dr Chalmers said his goal was “to find the best person to take the Reserve Bank into the future along the path that has been proposed by the RBA review team.”

“The appointment or reappointment of Phil Lowe or otherwise does not depend on any one decision or any set of decisions.”

Dr Lowe is expected to go into more detail about the central bank board’s decision when he addresses the Morgan Stanley Australia Summit in Sydney on Wednesday morning.

In a statement released on Tuesday afternoon, Dr Lowe conceded inflation had passed its peak but said but said its current level, 7 per cent, was still well above the central bank’s 2-3 per cent target.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable time frame,” he said.

It means borrowers with a mortgage of $500,000 will be paying an extra $76 a month while Australians with a $750,000 loan will be slugged an additional $114, according to RateCity.

All eyes will now be on the banks to see which will be the first to respond to the RBA’s June hike.

Dr Lowe said he understood that many Australians were experiencing a “painful squeeze” on their finances but noted household consumption was still a “significant source of uncertainty”.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending,” he said.

“Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances.”

Opposition treasury spokesman Angus Taylor said the rate rise was squarely on Labor’s shoulders, and claimed the government’s fiscal, energy and industrial relations policy had combined to “create an inflationary fire”.

Dr Chalmers was quick to brush aside suggestion his latest budget led to the rate hike. Picture: NCA NewsWire / Glen Campbell

Meanwhile, the business lobby has placed the blame on the Australian Council of Trade Unions, which lobbied for the independent wages umpire to increase award wages.

“If last week’s wage increase was brought to you by the ACTU, so too is today’s rate rise,” Australian Chamber of Commerce and Industry chief executive Andrew McKellar said.

“The result of the ACTU’s irresponsible wages claim could not be clearer – wages growth not supported by productivity gains risks entrenching inflationary expectations and inflationary pressures.”

ACTU secretary Sally McManus promptly returned serve, accusing big business and banks of fuelling a profit-price spiral and the RBA of heaping pressure on working people doing it tough.

“The RBA seems hell bent on crushing consumers and continues to punish those who did nothing to cause this cost-of-living crisis,” she said.

The government will on Wednesday release the national account figures for the first quarter. A “substantial slowing” of the economy over the next 18 months is expected to be forecast, Dr Chalmers said.

Speaking following the decision, Dr Chalmers acknowledged it would be difficult for the RBA to bring down inflation without crashing the economy.

“That is the inevitable consequence I think of higher interest rates biting at the same time as the global economy is a precarious place,” he said.

But he stressed a recession was not in the Treasury or RBA’s forecasts. “That’s not our expectation,” he said.

“The job that the independent Reserve Bank has is to try and get on top of this inflation challenge in our economy without crashing our economy, and we’ve known for some time that is a difficult path to tread.”