The Labor government is under pressure to bring forward its own cost of living measures after the Reserve Bank delivered its biggest one-off interest rate rise in more than two decades while admitting inflation was going to get worse than predicted just a month ago.
On Tuesday, the RBA lifted interest rates by half a percentage point as governor Philip Lowe said inflation was increasing significantly. The official cash rate is 0.85 per cent, but the bank has previously flagged further rate rises in coming months as it moves away from the “extraordinary” pandemic monetary support that pushed rates to historic lows of 0.1 per cent from November 2020.
RBA governor Philip Lowe.Credit:Louie Douvis
“While inflation is lower than in most other advanced economies, it is higher than earlier expected,” Lowe said. “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
The increase means the official interest rate has jumped 0.75 percentage points in five weeks, driving mortgage repayments up by hundreds of dollars a month at the same time. Two of the big four banks expect a further hike of 0.5 percentage points at next month’s meeting.
Westpac was the first major lender to announce it would increase mortgage interest rates by 0.5 percentage points, passing on the Reserve Bank’s rate rise to customers in full.
The banking giant said on Tuesday night that it would lift variable home loan rates by 0.5 percentage points from June 21.
It said it would also offer a one-year term deposit rate of 2.25 per cent, and other deposit rates were under review.
Treasurer Jim Chalmers said the government had inherited a tough set of economic circumstances and warned the cost of living pressures were going to get worse in coming months.
“It is the universal expectation across economists and government and the Reserve Bank that this inflation challenge will get harder before it gets easier,” he said.
Someone with an average NSW mortgage of $800,000 on a 25-year loan faces an increase of about $320 a month due to the 0.75 per cent increase, while a household with an average Victorian mortgage of $650,000 will see an increase of about $260 a month.
Tuesday’s move is the biggest one-month increase in the official cash rate since February 2000 at the peak of the dot.com boom and when the property market was soaring. It’s only the second rise since November 2010 after the bank last month lifted the cash rate from a record-low 0.1 per cent to 0.35 per cent.
The hike also shocked financial markets, knocking nearly $18 billion from the ASX200 within minutes of the RBA’s announcement, while the Australian dollar spiked at US72.49¢.
Treasurer Jim Chalmers said inflation would worsen. Credit:Alex Ellinghausen
Chalmers said the government would do what it could to alleviate the pressure on households, but Australians would have to wait until the October budget for additional support beyond the existing cost of living assistance, including the 22 cent-a-litre cut to fuel excise.
“There’ll be cost of living relief in the October budget in the form of childcare relief, in the form of relief from the costs of medicines. And also when it comes to getting real wages moving again and getting that downward pressure on energy prices,” he said.
Shadow Treasurer Angus Taylor said the best thing the government could do to contain interest rates and inflation would be to curb spending.
“What we don’t need is unnecessary government spending,” he said.
The larger than predicted move from Australia’s central bank came amid signs inflation was continuing to heat up, having grown to 5.1 per cent in the 12 months to March.
“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” Lowe said, having last month stated it was expected to reach 6 per cent.
AMP chief economist Shane Oliver said it looked likely that inflation would rise to 7 per cent or so in the second half of the year, and previous experiences told experts that the longer high inflation persisted, the harder it would be to bring it down without a recession.
Oliver said falling home prices and weak consumer confidence, as indicated in the ANZ-Roy Morgan survey, showed the RBA’s interest rate hikes were already getting traction. Last month, property values across the country fell by 0.1 per cent, the first national fall since September 2020.
“[The RBA] does not want to crash the economy and is not on autopilot,” Oliver said. “So it will be watching indicators of spending and things like house prices very closely.”
EY chief economist Cherelle Murphy said the RBA was confident the economy could cope with the 0.5 percentage point rise, even though households were facing price pressures on other fronts including power bills.
She said while some households would struggle, the RBA was willing to accept that, and current interest rates were still “extraordinarily low”.
“[Households] should expect more hikes in their mortgage rates, and perhaps even additional basis points from the banks who may try to claw back some margin as the cycle progresses,” she said.
The RBA governor has previously said the bank wanted to return the cash rate to a “more normal” level, which he expects would be around 2.5 per cent.
Commonwealth Bank and Westpac economists believe the RBA’s next rate move will be to lift interest rates by 0.5 percentage points in July, taking the cash rate to 1.35 per cent.
“The bank now recognises that it has a significant challenge to contain inflation and today’s decision points to it now being prepared to act decisively,” Westpac chief economist Bill Evans said.
Tuesday’s RBA statement noted there will be uncertainty about how household spending will evolve, and Barrenjoey economists said that will definitely need close attention.
“The key uncertainty is how household spending responds,” the economists said.
Cut through the noise of federal politics with news, views and expert analysis from Jacqueline Maley. Subscribers can sign up to our weekly Inside Politics newsletter here.