Reserve Bank raises interest rate for second time in 35 days as economy falters
Homeowners have copped another major blow, with the Reserve Bank announcing a “super-sized” rate rise nobody saw coming.
The Reserve Bank of Australia pulled another shock move, hiking the official cash rate by 50 basis points and catching experts off guard.
At the RBA’s June meeting this afternoon, the Board decided to lift the official cash rate to 0.85 per cent, returning it to its highest level since September 2019 and marking the first back-to-back rate rise in 12 years.
It comes after the RBA caught many off guard last month by raising the cash rate by 25 basis points, from the historic low of 0.1 per cent to 0.35 per cent, in the middle of the election campaign.
The unexpected size of the rate rise has sent shockwaves across the country, and provided yet more evidence that all is not well economically.
And clues from the RBA itself – as well as predictions from countless finance experts – indicate today’s hike will be just the tip of the iceberg.
Aussies cop ‘super-sized’ rate rise
The RBA has once again caught finance experts off guard by announcing a so-called “super-sized” rate rise after the June Board meeting.
Until this afternoon, opinions were split over whether the RBA would announce a rate rise of 25 or 40 basis points – but today’s 50 basis point rise took economists well and truly by surprise.
“Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected,” RBA Governor Philip Lowe said in a statement this afternoon.
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“Global factors, including Covid-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices. “Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. 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.”
‘Just a taste of what’s to come’
Meanwhile, experts agree today’s rate hike is just the tip of the iceberg.
“With inflation at a two-decade high, the RBA will hike rates aggressively over the remainder of this year,” APAC economist at Indeed Callam Pickering said in a statement.
“Rate hikes in both May and June are just a taste of what’s to come.
“Whether these rate hikes will work is the trillion dollar question. Australia has imported high inflation from abroad and that is not typically a channel through which the RBA has tremendous influence.
“Compounding matters, markets are pricing in a cash rate of 2.7 per cent by the end of the year. If the RBA hikes rates at a slower pace – which they almost certainly will – then the resulting depreciation of the Australian dollar will put upward pressure on inflation.”
Meanwhile, Treasurer Jim Chalmers has also weighed into the rate rise – the first under the new Labor government – declaring it “difficult news for homeowners” already feeling the pinch.
Difficult news for homeowners already facing skyrocketing costs of living, including spiking energy prices. A better future awaits but first we have to navigate together this inflation challenge we inherited, and the rising interest rates that accompany it. #ausecon#auspol
— Jim Chalmers MP (@JEChalmers) June 7, 2022
In a press conference called soon after the RBA bombshell, Mr Chalmers said the rate rise would stretch household budgets even further at a time when the nation was facing a string of economic challenges.
“We have an incredibly difficult challenge of combinations,” he said this afternoon.
“High and rising inflation, rising interest rates, falling real wages at a time when our ability to respond to these challenges is constrained by the fact that the budget is absolutely heaving with Liberal debt.”
KPMG chief economist Dr Brendan Rynne said the RBA’s decision to “go big” with a 0.5 per cent rate hike shows its “desire to bring the rate up to as close to neutral settings as soon as possible”.
“It shows that the RBA believes that inflation risks are firmly on the upside,” he said.
“Going big has the advantage of clearly reinforcing the message that the central bank is looking to curtail inflation risk – especially that of allowing inflation to become embedded – by moving rates by a larger than average amount.”
And Compare the Market’s digital banking expert David Ruddiman also agreed it was a tough situation for the nation.
“Some homeowners won’t have seen rate rises of this magnitude since they first took out their mortgage,” Mr Ruddiman said.
“Rampant inflationary pressures, recent wages growth and record low unemployment made an increase of 50 basis points to a cash rate of 0.85 per cent a logical position given the current circumstances, but there will still need to be considerable increases in the months ahead.
“Of course, while this will start to contribute to getting inflation back under control, it will inevitably lead to another large increase in monthly mortgage repayments – more than we’ve seen in nearly a quarter of a century.
“In the current economic environment, this is like trying to arm wrestle an octopus.”
‘A lot worse’: Australia on the brink
In this month’s RBA Cash Rate Survey by comparison site Finder, 86 per cent of economists and experts expected a hike, while 28 per cent believed there will be at least two cash rate increases before the end of the year.
But Finder head of consumer research Graham Cooke said Australians were already feeling the pinch.
“The economy is at a precipice and some families are really starting to struggle financially with the cost of living – and for those with a home loan, it could get a lot worse,” he said.
“Lifting the cash rate is good news for savers, and will help to slow Australia’s runaway property market, but those with a home loan are in line for several further cost increases.”
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