Reserve Bank raises interest rates for fourth-straight month

The Reserve Bank has increased interest rates for the fourth month in a row, raising its cash rate target by half a percentage point.

The RBA has now lifted its benchmark interest rate by 1.75 percentage points since its first rate rise in May, with the cash rate target sitting at 1.85 per cent.

In his post-meeting statement, Reserve Bank governor Philip Lowe said the latest rate rise was unlikely to be the last this year.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” he said.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

St George Bank chief economist Besa Deda said the Reserve Bank had already raised rates faster than any time since 1994, but she expected more.

“We think their cash rate could have a 3-handle on it by the end of this year, because inflation is running at its fastest rate since the early 1990s,” she told The Business.

“We are expecting that the Reserve Bank will deliver rate hikes for every board meeting until February next year.”

Mr Lowe acknowledged that would be a difficult task.

“The board places a high priority on the return of inflation to the 2-3 per cent range over time, while keeping the economy on an even keel,” he warned.

“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments.”

The managing director of EQ Economics and former ANZ Bank chief economist, Warren Hogan, warned that a recession was a “real risk” if the Reserve Bank raised interest rates too fast.

“I think they just need to be patient with this tightening cycle and try and get this inflation under control over a couple of years, rather than rush it and try and get it done within a year,” he cautioned.

He also told the ABC’s AM program that many of the threats to the economy were partly of the Reserve Bank’s own making.

In particular, he singled out the RBA’s statements until late last year that interest rates were unlikely to rise from near-zero until at least 2024, which he said lured many people to borrow too much money.

“I think the first home buyers are the ones who have the most significant grievance,” he told AM.

“When they first start that, they’re the most vulnerable to higher rates. And to be told by the central bank that rates will stay where they are, no matter how much conditionality they put on it, that nuance is lost on the broader community.

“And now they’re staring down the barrel of the most significant tightening of monetary policy in the modern era.”

Figures from RateCity show the latest rate rise, if passed on in full by banks, will add another $140 a month to repayments on a $500,000 home loan.

Since rates started rising on May 3, someone with a $500,000 loan would be paying $472 a month more if their bank had simply matched the RBA moves.

‘It’s gonna be rough’

Man Huynh is one of those first home buyers struggling with the unexpected surge in mortgage repayments.

He also owns two adjoining businesses in the Melbourne suburb of Footscray, selling hot dogs and bubble tea.

With annual inflation hitting 6.1 per cent and interest rate hikes, Mr Huynh is being hit by multiple cost pressures at work and at home.

“Everything’s going up — our bread, our rent, our insurance, everything. Even our wages are going up,” he said of his business costs.

Mr Huynh bought his first house in October last year and, even before today’s rate rise was passed on, his lender Pepper Money had increased his variable interest rate from 3.8 per cent to 5.37 per cent.

“It’s gonna be rough, we don’t know when it’s gonna stop.”

The steep increase in the cost of his mortgage was unexpected for Mr Huynh, who said his mortgage broker told him interest rates would likely only rise by between half to 1 percentage point.

“If you hear that it will only go up by a half per cent, then yes, you go and purchase the house,” Mr Huynh said.

Mr Huynh said he would have made different decisions if he had known interest rates would rise this hard and fast.

“Definitely, I would have delayed purchasing my first time,” he said.

Mr Huynh’s climbing expenses come at a time when business is far from back to normal, and he has closed his other outlets to focus on his Footscray site.

“We are in front of a train station, we are in a prime position, yet no one’s catching the train, and everyone is still working from home,” he added.

Housing market, consumer confidence tumble

The rapid rise in interest rates since the start of May, combined with the high inflation that triggered the RBA’s moves, has seen consumer-confidence levels sink to depths usually seen during recessions.

House prices have also started falling rapidly in Australia’s largest cities, while they are softening in other parts of the nation as well.

“It hasn’t taken four Reserve Bank cash rate rises to slow down new borrowing, with the latest ABS new loan commitments showing that new housing lending fell in June by 4.4 per cent,” Canstar finance expert Steve Mickenbecker said.

“New borrowing has now fallen below last year’s level but is still up on pre-pandemic volumes.

“With more rate increases ahead, buyers and sellers are nervous about what is to come from this year’s spring selling season. Investors, who were previously the most bullish sector, are leading the exit.”

Federal Treasurer Jim Chalmers is warning the latest RBA decision will “sting”, even though Australian households have been bracing for further rate rises.

“Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures, like higher grocery prices and higher power prices, and the costs of other essentials,” he told parliament just seconds after the RBA announcement was made.

“This decision doesn’t come as a surprise.

“It’s not a shock to anybody, but it will still sting.”

He argued the warning signs were clear prior to the election, and the federal government’s budget bottom line would also take a hit as a result.

Shadow Treasurer Angus Taylor said Mr Chalmers’ comments would be cold comfort to Australians doing it tough, and demanded more detail soon on any cost of living relief being planned by the government.

“It’s the fourth interest rate increase in a row, we’ve got the highest inflation since the early 90s,” Mr Taylor said.

“We want to see a plan, we don’t want to have to wait till the budget.”