Reserve Bank hikes rates by 0.25 percentage points to 3.10pc to curb inflation

The central bank, led by Philip Lowe, has lifted rates to 3.10 per cent, its eighth hike since May, in a desperate bid to stop runaway inflation.

Reserve Bank governor Philip Lowe has made himself more unpopular with an eighth straight rate rise just weeks away from Christmas. Picture: Gary Ramage/NCA NewsWire

The Reserve Bank has lifted the cash rate from 2.85 per cent to a decade-high of 3.1 per cent, delivering the eighth hike in as many months and more pain for indebted households just weeks out from Christmas.

RBA governor Philip Lowe in his accompanying statement said “the board expects to increase interest rates further over the period ahead, but it is not on a preset course” – sticking to a script established over recent months and sinking hopes he would soften his language around the need for more policy tightening.

  

As Westpac became the first major bank to announce it would pass the increase to its customers, RateCity analysis showed the latest RBA move, once factored into variable mortgage rates, would add a further $113 to the monthly repayment on a $750,000 home loan.

At the start of May, a household with a loan of this size was paying $3500 each month, but with the latest hike will be paying about $4750 – an increase of more than a third, the analysis showed.

Despite the climbing burden on 3 million households with a mortgage, Dr Lowe said the most aggressive rate hike cycle since the early 1990s “has been necessary to ensure that the current period of high inflation is only temporary”.

“High inflation damages our economy and makes life more difficult for people,” he said.

Jim Chalmers said the latest rate hike would be “very difficult news” for many homeowners.

“This is the Christmas present that no Australian homeowner wanted,” the Treasurer told Sky News. “I think we are seeing the beginnings of the economic impact of these rate rises.

“Australians with a mortgage and particularly those with a big mortgage are already feeling the impacts of these rate rises since before the election. But the economic impact is still to play out, still ahead of us.”

Australian Chamber of Commerce and Industry chief executive Andrew McKellar said the RBA was doing what it could to cool demand, and the onus was now on the government to do more to address supply-side issues that Dr Lowe has said are responsible for half of this year’s inflationary pulse.

“With national cabinet meeting this Friday, a plan to address skyrocketing energy prices, without further stoking inflation, is a critical priority for families and for businesses,” he said.

With the next board meeting not scheduled until February, Dr Lowe said “the size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market”.

  

CBA head of Australian economics Gareth Aird said the central bank had “delivered a massive amount of tightening in a short space of time”.

But Mr Aird said he saw no sign from Dr Lowe of an imminent pause, and he now expected a further hike to 3.35 per cent in February.

“The risk sits with a peak in the cash rate of 3.6 per cent,” he said.

Dr Lowe said inflation of 6.9 per cent in October, down slightly from 7.3 per cent in September, was “too high”, and would rise still higher to peak at 8 per cent in December. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” he said.

ANZ head of economics David Plank also saw no evidence of an imminent end to the run of hikes, and said rates would reach 3.85 per cent by May.

But after lifting rates from their record low of 0.1 per cent to 3.1 per cent over eight straight monthly meetings, Dr Lowe recognised “there has been a substantial cumulative increase in interest rates since May”.

The RBA governor said the “full effect of the increase in interest rates is yet to be felt in mortgage payments”, and “household spending is expected to slow over the period ahead, although the timing and extent of this slowdown is uncertain”. Dr Lowe said a deteriorating global economy was “another source of uncertainty”.

For now, however, the economy remains resilient. While there have been some early indications higher rates are starting to crimp spending, retailers remain hopeful of a bumper festive season. The Australian Retailers Association this week forecast pre-Christmas spending would reach a record $66bn – more than 6 per cent higher than a year earlier.

Unlike central banks in the US, UK and New Zealand, Dr Lowe still believed there was a chance to tame inflation without triggering a recession in 2023.