Reserve Bank of Australia delivers 10th consecutive interest rate hike

The Reserve Bank has delivered the 10th straight rate hike – to 3.6 per cent – before softening its language about the need for more increases.

Philip Lowe says further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. Picture: Getty Images

The end of punishing rate hikes is in sight, after the Reserve Bank delivered its 10th straight increase – to 3.6 per cent – before softening its language about the need for more increases even as it vowed to “do what is necessary” to control inflation.

Tuesday’s 0.25 percentage point increase in interest rates will add an extra $77 on the monthly interest bill for a household with a $500,000 mortgage, according to ­RateCity, bringing the total increase debt servicing since the RBA started hiking in May to $980 a month, or $11,800 a year.

On a $750,000 mortgage, borrowers will be paying an extra $116 a month, and $1500 more than in April last year – a 42 per cent increase.

In a statement accompanying Tuesday’s widely anticipated decision, RBA governor Philip Lowe recognised the “painful squeeze” on some household budgets, but said “the board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary”.

That was more “dovish” language than after last month’s meeting, when Dr Lowe said the board expected “that further increases in interest rates will be needed over the months ahead” to regain control of inflation.

Citi chief economist Josh Williamson said replacing that key phrase from last month’s statement was “a significant change of guidance”, pointing to one, rather than two, more rate rises on the immediate horizon.

“The end looks to be in sight to cash rate increases,” Mr Williamson said, even as he warned there was a risk the central bank may pause too early, risking even higher rates later if consumer price pressures do not come down as quickly as anticipated.

Monthly inflation eased to 7.4 per cent in January, from 7.8 per cent in the year to the December quarter, and Dr Lowe in his statement said this “suggests that inflation has peaked in Australia”, although he also said “global inflation remains very high”.

Dr Lowe said “growth in the Australian economy has slowed”, and that the “growth over the next couple of years is expected to be below trend”.

“The board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” he said.

“There is uncertainty around the timing and extent of the slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living.”

A number of economists and the financial markets have pencilled in two more rate rises in April and May, before a potential pause at 4.1 per cent, but the more ambiguous language raised the possibility of an earlier halt.

Investors immediately reacted to the statement by selling the Australian dollar, which dipped by half a penny to below US67 cents, and buying stocks, helping push the ASX 200 index up 0.5 per cent to 7363 points.

Jim Chalmers said “another interest rate rise today will put more pressure on borrowers and businesses”, noting that mortgage holders paid an $20bn in interest in the December quarter, or almost double the amount from the previous quarter.

“The principal issue for the economy right now is inflation, as you know, and that means it’s the government’s main priority,” the Treasurer told a Financial Review business conference on Tuesday evening.

“The combination of high living costs, rising interest rates and global uncertainty has slowed our economy and will slow it some more.

“While the Reserve Bank does its difficult job, we do ours – using the levers we have available to us, a combination of relief, repair and restraint,” he said.

“Cost-of-living relief where it can be done responsibly and where we think we can get an economic dividend out of it. Repairing some of the supply side issues that exacerbate inflation. Restraint in the budget, and modest but meaningful changes to super concessions that will improve the structural position.”

But Deloitte Access Economics head Pradeep Philip said the government was not doing enough to help alleviate inflationary pressures on the supply side, and that leaving the job to monetary policy was “increasing the chance of an unnecessary recession”.

“National accounts and CPI data released last week revealed that both economic growth and inflation have slowed faster than expected, making the wisdom of this decision hard to understand,” Dr Philip said.

“Given interest rates attack inflation from the demand side, they are not fully effective in fighting inflation being driven by supply side issues,” he said.

“Unfortunately, the RBA has few other tools at its disposal to help fight inflation and has indicated further rate lifts are to come. We need to take a holistic look at ways to tame inflation, which necessitates a greater role for fiscal policy. In the meantime, the RBA should pause rate hikes, or it will overshoot and cruel the economy.”

In his statement, Dr Lowe made it clear that regaining control of inflation was the “board’s priority”.

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.

“The board is seeking to return inflation to the 2-3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

Dr Lowe signalled he had become less concerned about a self-reinforcing upward spiral between prices and wage claims.

“The labour market remains very tight, although conditions have eased a little,” he said.

“Wages growth is continuing to pick up in response to the tight labour market and higher inflation. At the aggregate level, wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another.

“The board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”

The widely anticipated decision by the RBA board at its second meeting of the year followed a string of softer data over recent weeks, including employment losses, a fall in retail trade and weaker-than-anticipated GDP figures, suggesting the rapid monetary policy tightening since May of last year has begun to weigh on broader economic activity.

But there are also signs of resilience, with trade figures released on Tuesday morning showing car imports reached a record $3.9bn in January, up 30 per cent on a month before, as consumption good imports more broadly climbing by 12 per cent.

Consumer price growth remains well above the central bank’s 2-3 per cent target range, and based on the RBA’s own forecasts is not expected to return to the top of the bad for another two years.

Dr Lowe will deliver a speech titled “Inflation and recent economic data” on Wednesday morning.