RBA raises cash rate by another 50 basis points to 1.35 per cent

The Reserve Bank has raised interest rates for the third month in a row with another massive hike set to cause more pain for borrowers.

The Reserve Bank has raised interest rates for the third month in a row with another massive hike set to add hundreds of dollars to monthly mortgage repayments for the average borrower.

After its July meeting this afternoon the RBA announced another 50 basis point increase, in line with market expectations, bringing the official cash rate target to 1.35 per cent.

The third back-to-back rise follows another shock 50 basis points in June – the largest increase since February 2002 – and 25 basis points in May.

May’s increase was the first since 2010, as the central bank lifted the cash rate from its record low emergency level of 0.1 per cent to combat soaring inflation.

“Today’s increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” RBA governor Philip Lowe said in his statement.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 1.35 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.25 per cent - https://t.co/QwoeT6U8OD

— RBA (@RBAInfo) July 5, 2022

For a typical owner-occupier with a $500,000 mortgage and 25 years remaining, today’s increase will see their monthly repayments rise by $137, according to RateCity.

Their total increase to date from the May, June and July rate hikes would be $333 per month.

For a borrower with a $1 million mortgage, today’s decision will add $273 to their monthly repayments, bringing their total increase to $665 per month since April.

“Australians are potentially staring down the barrel of the steepest RBA hikes since 1994,” said RateCity research director Sally Tindall.

“Variable rate borrowers should prepare for another 0.50 percentage point hike this month and potentially another double hike in August. This would be a bold move by the Reserve Bank but not at odds with action other central banks are taking to rein in inflation.”

Finder head of consumer research Graham Cooke said it was “tough news” for many homeowners, with one in four already struggling to meet their monthly mortgage payments in June.

“There’s no light at the end of the tunnel just yet, with our panel forecasting at least two more rate rises to come,” he said.

“This will put further downward pressure on a rapidly deflating housing market.”

CoreLogic figures showed national house prices fell for the second consecutive month in June by 0.6 per cent.

The research firm says the trajectory of the falls will be “heavily dependent” on the path interest rates take.

“A peak-to-trough decline of more than 10 per cent is becoming more mainstream across the various private sector forecasts,” said CoreLogic head of research Tim Lawless.

“Ten per cent decline in the market would take national housing values back to levels similar to July 2021. A 15 per cent decline would take the market back to April 2021 levels. A 20 per cent decline in home values would take the national index to January 2021 levels, and only marginally above where home values were in late 2017.”

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Household budgets are under strain. Picture: Brendon Thorne/Getty Images

Treasurer Jim Chalmers said the rate rise would only put family budgets under further strain.

“This is really challenging news for Australians who are already doing it tough, mortgage repayments will now eat up an even bigger part of household budgets which are already stretched,” he told reporters in Canberra.

“The skyrocketing cost of essentials like groceries and petrol is putting extreme pressure on household budgets and this rate rise today will add to the pain. Whether this inflation challenge lasts six months or 12 months, I am confident that a better future lies ahead, but first we need to show that characteristic Australian resilience.”

Dr Lowe has previously said a 75 basis-point increase was “not on the table” at this time, but “graduated steps” of 25 or 50 basis points were being considered.

His comments seemed to pour cold water on suggestions the official cash rate would reach 4 per cent in 2022, as to do so, the RBA would have to announce at least one 0.75 percentage point hike.

But with consumer prices rising 5.1 per cent in the 12 months to the March quarter, he acknowledged the RBA only had a “narrow path” to rein in runaway inflation without in turn causing an economic downturn.

“There is a path there to have inflation come down without the economy having too much pain, but it’s a narrow path,” Dr Lowe told a UBS panel discussion in Zurich.

Dr Lowe told the American Chamber of Commerce in Australia last month the RBA had a plan and was being guided by relevant information and data.

“The higher interest rates globally will help to create a more sustainable balance between the demand for goods and services and the ­ability of our economies to meet that demand,” he said.

“As we chart our way back to 2 to 3 per cent inflation, Australians should be prepared for more interest rate increases. We decided to make a bigger 50 basis point adjustment on the basis of the additional information suggesting a further upward revision to an already high inflation forecast.”

Reserve Bank governor Philip Lowe. Picture: Dan Himbrechts/AAP

He added, “I want to emphasise though that we are not on a preset path. How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”

Former RBA board member John Edwards has previously forecast that the inflation rate will increase to 7 per cent by the end of the year.

“It is going to be some years, I think, before inflation is back in the 2-3 per cent range,” he said.

“Over the next couple of years, it will gradually come down. That is why it is important that we chart this path back there and people have confidence that we will do that.”

It comes after two of Australia’s four big banks raised their fixed mortgage rates last week in anticipation of the interest rate increase.

The Commonwealth Bank of Australia raised its rates by 1.4 per cent last Thursday, while NAB increased its rates by up to 1.1 per cent the next day.

Ms Tindall said the cash rate was forecast to increase by 2.5 percentage points in less than a year, adding $685 to monthly repayments for an borrower with a $500,000 loan.

“Governor Lowe might have poured cold water on suggestions the cash rate could get to 4 per cent by Christmas, but the RBA is still likely to rip the Band-Aid off quickly,” she said.

“Borrowers should sit down and work out what a 2.5 percentage point interest rate increase would do to their monthly repayments. If that number doesn’t sit well with them, the time to take action is now. Refinancing to a lower rate can help inject ongoing relief into the monthly budget and keep people afloat in what is likely to be a tricky time for some families feeling the heat.”

In an interview with ABC’s 730 last month, Dr Lowe defended his past statements that rates would not rise before 2024, saying “the economy didn’t evolve as we expected”.

“What would you say to people watching who feel rattled because they think, ‘Well, I made borrowing decisions based on what was said last October and now it’s changed so I feel stressed, I feel worried about where it’s going’?” host Leigh Sales asked.

“I understand that people will make borrowing decisions based on our communication, and people took out loans that they may not have otherwise taken out,” Dr Lowe replied.

“I also point to the fact that the economy’s done remarkably well. The unemployment rate is at a 50-year low, a higher share of the population has a job than ever before, households have built up very large financial buffers. Over the past couple of years people have put away an extra $250 billion – it’s a lot of money, and the saving rate is still high, and the number of people who’ve fallen behind in their mortgages is actually declining, not rising.”

The RBA will release its decision at 2.30pm AEST.

— with NCA NewsWire

Originally published as RBA raises cash rate by another 50 basis points to 1.35 per cent