The Reserve Bank of Australia approved a record breaking sixth interest rate rise in a row on Tuesday, lifting its target cash rate 0.25 percentage points in a bid to quell soaring inflation.
The move brings the official interest rate to 2.6 per cent – the highest level since 2013, and will add another $74 to typical mortgage bills.
A household paying down a 25-year $500,000 mortgage has now seen their monthly bill rise by $687 since the RBA started hiking rates in May.
Reserve Bank Governor Philip Lowe said such rate rises are needed to curb the fastest rate of inflation in more than 30-years.
“As is the case in most countries, inflation in Australia is too high,” he said in a statement on Tuesday afternoon.
“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”
Markets were unsure whether the RBA would opt for a 0.25 percentage point hike in October or a larger 0.50 percentage point rise.
The past five rate hikes since May have all been 0.50 percentage points.
But Dr Lowe had said in September that the case for smaller monthly rises is growing as rates increase from their record lows during COVID.
That the bank opted for a smaller increase is a sign it is optimistic inflation will peak later this year and begin to ease in early 2023.
Australia’s headline inflation rate is forecast to peak at 7.8 per cent in the December quarter before easing early next year – it rose to 6.1 percent over the June quarter, according to official statistics.
“The expected moderation in inflation next year reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates,” Dr Lowe said on Tuesday.
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”
Callam Pickering, Indeed APAC economist, said the smaller rate hike is a “sign they [the RBA] are getting closer to a pause in rates”.
“Typically the RBA will use a pause to assess economic conditions and determine how policy changes are impacting the economy,” he said.
“The Australian economy has proved resilient throughout the year, particularly since rates began to rise in May, with retail spending remaining strong, unemployment low and job vacancies elevated.
“Rather than deteriorate, there is a strong argument that the labour market could tighten further in the near-term.”
