RBA raises rates to 2.85 per cent on Melbourne Cup day

The Reserve Bank has increased interest rates by just 0.25 percentage points as it aims to keep the economy on an ‘even keel’.

The Reserve Bank has opted for a business as usual rate hike of 0.25 percentage points, lifting the cash rate from 2.6 per cent to 2.85 per cent.

It is the seventh straight hike since May, as the central bank battles to contain inflation without sinking the economy.

The quarter-point increase will add $112 to the monthly interest bill on a $750,000 mortgage, bringing the full increase in repayments since the RBA began hiking in May to $1140, according to RateCity.

Most experts had factored in a 0.25 percentage point increase, however a 0.50 percentage point hike was also named a ‘real risk’ by some given the latest inflation figures.

“As is the case in most countries, inflation in Australia is too high,” the central bank said on Tuesday.

“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades.

“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.

“The labour market remains very tight, with many firms having difficulty hiring workers.

“Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

“Price stability is a prerequisite for a strong economy and a sustained period of full employment.

“Given this, the Board’s priority is to return inflation to the 2–3 per cent range over time.

“It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance remains a narrow one and it is clouded in uncertainty.”

“Australians are already facing the highest annual rise in the cost of goods since 1990. Throw in skyrocketing mortgage costs and it’s a double whammy for families struggling to make ends meet,” RateCity research director Sally Tindall said.

“While some families are doing it tough, many households still continue to have significant savings buffers at the ready for a rainy day, with the latest APRA data recording yet another increase in household deposits to a record $1.32 trillion.

NAB’s head of market economics Tapas Strickland on Tuesday had said there was a “real risk” of the RBA hiking by 0.50 percentage points.

That would take the cash rate to 3.10 per cent – the highest since November 2012.

The RBA decision comes as home prices across the nation fell by 1.2 per cent in October - the sixth straight decide - according to CoreLogic data.

Will all big banks pass on the rate hike in full? Picture: NCA Newswire

Cash rate hikes are unlikely to have a “huge impact” on taming inflation amid global pressures, Australia Institute senior economist Matt Grudnoff has warned.

Mr Grudnoff said more economists were taking the view that the Reserve Bank would opt for a 50 basis point increase on the back of recent inflation data, which showed an annual 7.3 per cent rise to September.

But even a supersized hike would be unlikely to bring that figure down – it is tipped to rise to 7.75 per cent by the end of the year before dropping off – because rate hikes have no impact on global supply-chain issues, Mr Grudnoff said on Sky News.

“The type of inflation we’re seeing at the moment is on the supply side, so it has to do with international movements of goods … high oil prices, gas prices, fertiliser prices, is to do with things like our flooding affecting fruit and vegetable prices,” he said.

“Higher interest rates doesn’t affect that.

“If Australia puts its interest rates up, that doesn’t affect the world price of oil. That’s to do with the war in Ukraine. That’s to do with the world economy emerging from the pandemic. “And so the increasing interest rates, I wouldn’t expect them to have a huge impact on inflation.”