More pain for borrowers as Reserve Bank hikes rates by 0.5pc to curb inflation

Two years of sub-par growth is the price we will pay to squash runaway inflation, Philip Lowe says, amid calls for the Reserve Bank to pause its aggressive tightening cycle.

Philip Lowe says ‘the board expects to take further steps in the process of normalising monetary conditions over the months ahead’. Picture: Arsineh Houspian

Reserve Bank governor Philip Lowe says two years of sub-par growth is the price Australians will pay to squash runaway inflation, with a third consecutive double rate rise triggering calls for the central bank to pause its aggressive tightening cycle.

The RBA board on Tuesday delivered a third straight 0.5 percentage-point rate increase to 1.85 per cent – the highest level in six years.

The move will add another $140 to the monthly interest bill on a $500,000 home loan, bringing the total increase since the first rate rise in May to $470, while repayments on a $750,000 mortgage would be $710 higher than three months ago, according to RateCity analysis.

Jim Chalmers told parliament “families will now have to make more hard decisions about how to balance the household budget in the face of other pressures, like higher grocery prices and higher power prices, and the costs of other essentials”.

The Treasurer, who on Tuesday morning warned that the government could not afford to extend the temporary 22c cut to the fuel excise beyond September, said the direct burden of more expensive loans primarily would affect mortgage holders “but there’s a broader economic impact as well”.

“There’s an impact on economic growth. There’s also an impact on the budget. It means that the $1 trillion of debt that the previous government left us gets even more expensive for us to service,” Dr Chalmers said.

Dr Lowe acknowledged that “higher inflation and higher interest rates are putting pressure on household budgets”, but said the central bank was determined to bring inflation back under control “while keeping the economy on an even keel”.

“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,” he said, while also noting that “a key source of uncertainty continues to be the behaviour of household spending”.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a preset path,” Dr Lowe said.

Citi chief economist Josh Williamson said while he anticipated more rate moves, Dr Lowe’s language suggested “the RBA has become more sensitive to potential economic fallout from trying to tame inflation”.

Deloitte Access Economics lead partner Pradeep Philip said it was time for the RBA to press pause and wait for more evidence on the impact of what was the fastest string of rate increases since the early 1990s.

“With a slowing global economy and the US Federal Reserve close to neutral (rate settings), it’s time for the RBA to be cautious,” Dr Philip said.

A supercharged rate rise cycle is piling pressure on mortgage holders, particularly those who took full advantage of record cheap loans during the pandemic property boom, which is now rapidly unravelling.

Rates started the year at 0.1 per cent, but an unexpected surge in inflation during the first three months of the year – exacerbated by surging fuel costs from the war in Ukraine – caught the Reserve Bank flat-footed, triggering an ­aggressive monetary policy response starting in May.

Consumer price growth hit 6.1 per cent over the year to June, a pace only equalled in the past three decades following the introduction of the goods and services tax in 2001.

“The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy,” Dr Lowe said.

Ahead of a full set of updated economic estimates on Friday, Dr Lowe on Tuesday revealed that the bank’s economists now forecast inflation reaching 7.75 per cent this year – in line with Treasury’s recently updated predictions.

The RBA also expects inflation to fall during the next two years, albeit more slowly than anticipated by Treasury officials, at 4 per cent next year – versus Treasury’s 3.5 per cent – before falling to 3 per cent in 2024.

“The expected moderation in inflation reflects the ongoing ­resolution of global supply-side problems, the stabilisation of commodity prices and the impact of rising interest rates,” Dr Lowe said.

The 1.75 percentage-point rise in the RBA’s cash rate target over four meetings since May has sunk consumer confidence to levels consistent with previous recessions.

Australian Bureau of Statistics data released on Tuesday morning showed home lending fell 4.4 per cent in June, while residential building approvals eased 0.7 per cent in the month.

Amid climbing concerns that the central bank’s inflation fight ultimately will stall growth and send unemployment higher, Dr Lowe said the economy was ­expected to grow by 3.25 per cent – sharply below the 4.2 per cent estimate in May.

Dr Lowe predicted real GDP growth would then slow to a below-trend rate of 1.75 per cent in 2023 and 2024.

Despite the more pessimistic outlook, Dr Lowe said “the Australian economy is expected to continue to grow strongly this year, with the pace of growth then slowing”.

“The bank’s central forecast is for the unemployment rate to be around 4 per cent at the end of 2024,” he said, against 3.5 per cent in July.

Dr Lowe has estimated that the “neutral” cash rate – the level at which monetary policy is neither contractionary or stimulatory – is 2.5 per cent, but economists have become increasingly convinced that rates will need to push to 3 per cent or above by early next year.