The Reserve Bank of Australia (RBA) lifts rates for a 12th time since May 2022 now 4.1%

Even with the threat of his seven-year term ending on 17 September this year, and hoping for a new tenure, Reserve Bank governor Philip Lowe presided over a board that has increased the official interest rate by 0.25% to 4.1%, a rate not seen at this level since 2012.

That takes some grit when so many are watching and criticising every move the Reserve Bank Board (RBA) makes in its endeavour to quell the very inflation it helped to create by leaving the cash rate too low for too long back in early 2022.

The RBA had little choice other than to increase the base rate with the consumer price index on the rise at 6.8% year-on-year and house prices once again on the up, from record price levels.

Then throw wage increases into the mix with no balance on the side of improved productivity growth and the recipe of leaping inflation has a determined base to escalate from.

And while an estimated 87% of economists were wrong last month when the RBA hiked rates by 0.25% their lot has improved slightly with only 68% getting it wrong two months on the trot.

And probably worst of all for consumers was the fact that three of the four big banks got it wrong as well, and obviously factored that information into their dealings with customers as to whether they could afford a loan.

One thing has become clear, the current RBA board members are worried that inflation is becoming too hard to tame and could very well expect to lift rates in July and August in order to get some stability back into the market.

Such a rise would place the cash rate at 4.6%, which is incidentally the 30-year long-term average for the base rate. A range that will be needed to quell spending and in turn inflation, if that is indeed enough.

Average home borrowers bear the brunt

For what many term an average home loan of $500,000 repaid over 30 years, the latest rate increase adds another $76 a month to repayments and that equates to an additional $1,134 a month since rates started hiking in May 2022. It is estimated total repayments on a $500,000 loan over 30 years is now around $3320 a month.

While borrowers with a home loan of $750,000 will need to find another $114 a month or $1,701 more since April 2022. And for a magic $1 million loan you will need to find an additional $2,269 a month more than the repayments required in April 2022, to around $6,640 a month.

Loan repayment imposts reminiscent of 1990 and the recession we had to have.

Statement from the RBA governor Philip Lowe

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.10 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.00 per cent.

Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range. This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.

High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality. 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. Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this. While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.

Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated. Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.

Wages growth has picked up in response to the tight labour market and high inflation. Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.

The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very 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 Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one. A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.

Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

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