The Reserve Bank of Australia has resumed hiking interest rates after holding steady for the past four months, piling on financial pressure for mortgage holders.
The RBA met on Tuesday and chose to hike the cash rate by 25 basis points to 4.35 per cent.
WATCH THE VIDEO ABOVE: Economists share RBA cash rate predictions ahead of Tuesday’s decision.
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It means the average borrower with a $500,000 loan and 25 years remaining will see their monthly repayments increase by about $76.
Economists at each of the big four banks had predicted the increase in the face of stubbornly high inflation, which RBA Governor Michele Bullock said had “passed its peak” but remained too high.
“The board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe,” she said of Tuesday’s decision.
Consumer prices as tracked by the Australian Bureau of Statistics’ Consumer Price Index rose 1.2 per cent over the three months to September.
Annually, the inflation rate grew 5.4 per cent but was reported as being well below the peak of 7.8 per cent last December.
Bullock added returning inflation to target within a reasonable timeframe remained the board’s “priority”.
“High inflation makes life difficult for everyone and damages the functioning of the economy,” she said.
“It erodes the value of savings, hurts household 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 much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
Treasurer Jim Chalmers told reporters on Tuesday the Labor government was doing its bit to address inflation by “rolling out cost-of-living relief in a way that puts downward pressure on inflation.
“This is a difficult day for people with a mortgage … and we do understand that Australians are already under substantial pressure in their household budgets and this will tighten the screws further,” he said.
“The government is doing its bit to address the inflationary pressures in our economy, the independent Reserve Bank has taken this decision today in the interests of this fight against inflation.
“What we’re doing as a government and what the Reserve Bank is doing … is all about trying to make sure that we can get on top of this inflation challenge in our economy, which is hurting our people and our economy more broadly.”
Bullock last month indicated that the board’s tolerance for a slow return to its inflationary target of between 2 and 3 per cent was low.
Chief economist at CreditorWatch Anneke Thompson said the decision to raise interest rates would be “controversial” but necessary as “some pockets of the economy are still seeing rampant price rises”.
“Unfortunately, the grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure. Therefore, this cash rate rise will have little impact on the prices of rents, fuel, insurance and utilities,” she said.
“Instead, this rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors.”