John Rolfe: Why Philip Lowe and the RBA hiked interest rates a 12th time and isn’t done yet

Two recent developments are behind not only this latest rate rise, but the growing likelihood that there are more in store. John Rolfe breaks down the latest pain for homeowners.

• First big bank passes on rate rise

With inflation failing to fall and many workers getting large pay increases, the Reserve Bank of Australia had little choice but to raise rates for a 12th time since May last year.

This latest 0.25 per cent hike will add more than $75 a month to repayments of a $500,000 loan and double that for households that have borrowed a million dollars.

As painful as today’s decision will be for many, it is probably necessary because it is the lesser of two evils.

If Philip Lowe and the RBA board simply cannot allow high inflation to become entrenched.

Because, as the Governor repeatedly says, bringing inflation down later will require even higher interest rates and will lead to more job losses.

Philip Lowe appearing at Senate hearing last month. Picture: NCA NewsWire’s Martin Ollman

There were a couple of significant pieces of news just before this latest RBA board meeting.

Last week, the Australian Bureau of Statistics’ monthly consumer price index (CPI) revealed inflation had gone back up towards seven per cent instead of down. That was also the case for the “trimmed mean” measure meant to remove irregular movements.

After 11 rate increases, that was a surprise and not good.

So the Governor will keep on tightening the screws until the CPI is on a path to three per cent or less.

The other and potentially more significant recent development is that about 2.6 million people on a minimum wage, award or enterprise agreement will get a 5.75 per cent pay increase from July.

That adds to the cost burden on employers and increases the likelihood of them increasing prices.

A growing number of economists and pundits believe the RBA will have to raise rates even further from here.

There is, however, an alternative explanation for inflation failing to fall.

That explanation is this: interest rate rises can’t do a whole lot to solve this particular inflation problem because it is mainly due to a supply shortage, not excess demand.

The RBA can’t add to supply. It can only reduce demand by increasing rates.

Originally published as John Rolfe: Why Philip Lowe and the RBA hiked interest rates a 12th time and isn’t done yet