The Reserve Bank this week pulled the trigger on interest rates as expected, hiking the official cash rate by 25 basis points to 0.35 per cent.
It’s the first time in more than 11 years the RBA has increased rates and it means borrowers on a $1,000,000 mortgage will pay around $130 extra a month on repayments.
The nation’s biggest bank, Commonwealth, was the first to pass on the hike in full to its customers.
Reserve Bank governor Philip Lowe said the soaring inflation figures and signs wages were on the up soon meant it was time to move rates out of their record lows.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he noted in his post-meeting statement.
“This will require a further lift in interest rates over the period ahead.”
Mr Lowe said it’s still going to be some time before interest rates hit more normal levels that at least match the inflation rate.
“Over time it is not unreasonable to expect interest rates would get to 2.5 per cent,” he said.
“How quickly we get there, and if we do get there, will be determined by how events unfold.”
Economists are now tipping another rate rise for June of either 25 or 35 basis points.
The Reserve Bank is tipping further increases to inflation this year as the cost of living pressure bites Australian households.
ANZ economist Adelaide Timbrell said it’s been so long since the Reserve Bank lifted rates, she wasn’t even a working economist back then.
Ms Timbrell told the ABC the RBA is trying to rein in price increases by making money more expensive.
“They’re going to keep raising the interest rate to make businesses think twice about investing, about hiring workers and about spending money,” she said.
“They’re also going to make consumers think twice about spending money.
“What this does is it slows down the spiral effect, where lots of people buy stuff at the same time, and then that stuff gets much more expensive over time.
“So the Reserve Bank is basically increasing the cost of borrowing money to decrease the speed of the cost of living going up.”
The Reserve Bank made a point of acknowledging those borrowers who took out home loans off the back of repeated comments by the RBA that rates were unlikely to increase until 2024.
“I acknowledge that the increase in interest rates comes earlier than the guidance that the bank was providing during the dark days of the pandemic,” Mr Lowe said.
“Households have much more debt than previously and many households have never experienced a rise with interest rates, so this is another aspect we are watching very carefully over the months ahead.”
With aspiring home loan borrowers able to borrow less, the interest rates hikes are likely to put downward pressure on the housing market in Melbourne for the rest of 2022 and into 2023.