RBA Slows Cash Rate Hike with 0.25pc Rise

The Reserve Bank has increased official interest rates by a quarter of a percentage point to a nine-year high of 2.6 per cent as policymakers try to tame surging inflation.

The bank increased the official cash rate after its monthly meeting on Tuesday, its sixth consecutive increase in the cash rate, which has now been ratcheted up by 2.5 percentage points since May.

The official cash rate sat at a record low of just 0.1 per cent between November 2020 and May this year, when the first of a series of consecutive rises began.

Annual headline inflation jumped to 7 per cent in July, the highest level since mid-1990, driven by soaring building costs, global oil prices and a marked uptick in the price of fresh fruit and vegetables. The RBA expects headline inflation to peak at 7.8 per cent later this year.

RBA governor Philip Lowe said global factors were to blame for high inflation, but strong domestic demand relative to the ability of the economy to meet that demand was also playing a role.

“The board is committed to returning inflation to the 2 to 3 per cent range over time,” Lowe said

“Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead.

“At some point, it will be appropriate to slow the rate of increase in interest rates and the case for doing that becomes stronger as the level of interest rates increases.”

The move offers some reprieve for mortgage holders after four consecutive double rate rises. 

Economists from NAB, Westpac, ANZ, tipped a half-percentage-point increase, reflecting ongoing strength in household spending, inflation momentum and near-record job vacancies. Commonwealth Bank chief economist Gareth Aird was one of the few analysts tipping a smaller rate rise.

“We expect a further 25-basis-point rate rise at the November board meeting,” Aird said

“From that point our central scenario has the RBA on hold as [the RBA] give themselves time to assess the lagged impact of rate rises on the Australian economy.

“The risk to our call sits with a further 25-basis-point rate rise at the December board meeting, which would take the cash rate to 3.10 per cent.”

CBA believes rates will peak at 2.85 per cent, while others are forecasting the cash rate will peak at 3.60 per cent. 

Similarly, AMP Capital chief economist Shane Oliver went against the consensus of a 50 basis point hike and anticipated a 25 basis point lift.

Oliver said the fastest rate hiking cycle since 1994 was now risking a “recession [Australia] didn’t have to have” if the RBA continued to tighten its monetary policy too aggressively.

“The RBA sensibly slowed the pace of hikes to 0.25 per cent, citing the substantial rise over a short period,” Oliver said. 

“This gives them time to better assess their impact given the lags. That said it remains hawkish and is still flagging more hikes ahead.

“We expect the peak at 2.85 per cent, but risk to 3.1 per cent.”

Julie Toth, chief economist at property settlement platform PEXA, said that rising interest rates were driving record numbers of mortgagees to refinance their loans, with PEXA’s refinance index hovering near its record highs.

Around 35 per cent of Australian households are owner-occupied with a mortgage. Around 31 per cent of households are renting. 

“Looking ahead, October’s inflation data will include rising petrol prices as the fuel excise is reinstated,” Toth said.

“This will be followed by the impact of fiscal policy measures in the Federal Budget, which is due to be announced in late October. 

“Budget measures that can ease the pressure on housing affordability and household living costs will be most welcome, as we rapidly approach Christmas and the summer holiday season.”

Within hours of the RBA announcement, the NAB said its standard variable home loan interest rate would increase by 0.25 per cent pa, effective from October 14, 2022.