Reserve Bank increases its official cash rate to 4.5 per cent

THE Reserve Bank hikes to 4.5 per cent with big banks quick to increase interest rates.

HOMEOWNERS will pay about $50 a month more on their mortgages after the Reserve Bank hiked its cash rate for the third month in a row.

The Reserve Bank's official cash rate is now 4.5 per cent.

The 25 basis point increase adds about $50 a month to a $300,000, 25-year home loan, according to research company Canstar Cannex.

The Commonwealth Bank was first to follow the Reserve Bank, lifting its standard variable rate by 25 basis points from 7.11 per cent to 7.36 per cent.

NAB also lifted interest rates on variable home loans 25 basis points to 7.24 per cent. Westpac and ANZ also raised rates in line with the RBA.

Economists had been tipping the rate rise, with the market pricing in a 69 per cent chance that the Reserve Bank board would hike its cash rate by 25 basis points.

Rates now back at "average levels"

The Reserve Bank governor Glenn Stevens said rates were now back at "average levels".

"With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more," Mr Stevens said in his statement to accompany the rates decision.

"The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels.

"This represents a significant adjustment from the very expansionary settings reached a year ago."

Mr Stevens said that the Board was not worried about Greece's debt problems and that world growth is expected to be at about trend pace this year.

"Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks," he said.

"This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe."

Inflation declines from peak - RBA

Mr Stevens also noted that inflation had declined from its peak in 2008 but would remain in the upper half of the bank's target zone.

"Recent data on inflation confirms that it has declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand.

"In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent.

"Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.

Reserve Bank reaches "average"

Economists are now forecasting the central bank will pause in June.

4Cast Financial Markets economist Michael Turner said he did not expect the bank to lift the cash rate again until August or September this year.

"They're going to have a look and see how things go this year," he said.

"They wanted to get rates back to average and they've done that."

- With AAP