The Reserve Bank has hiked rates for the first time in more than two years, and signalled there could be more to come, with mortgage holders to bear the brunt of dealing with a sharp and unexpected jump in inflation.
The RBA monetary policy board announced on Tuesday at the end of its two-day meeting that the cash rate target would lift to 3.85%, from 3.6%, raising borrowing costs.
The RBA governor, Michele Bullock, said the board felt it was necessary to make a rate “adjustment”.
“I know this is not the news that Australians with mortgages want to hear, but it is the right thing for the economy,” Bullock said.
“Based on the data we’ve seen and the conditions here and around the world, the board now thinks it will take longer for inflation to return to target, and this is not an acceptable outcome.”
The widely anticipated decision marks the end of the shortest rate-cutting cycle in the RBA’s modern history, after three reductions in the cash rate target in February, May and August of last year.
The quarter of a percentage point increase will increase the interest cost on a $600,000 home loan by $90 a month, bringing the monthly repayment to $3,782, according to Canstar.
Banks immediately announced changes to their mortgage after the decision, with the country’s biggest lender, Commonwealth Bank, to increase variable rates on home loans by 25 basis points from 13 February.
Some experts leading into the decision warned that a rate hike would be an overreaction to the recent uptick in inflation and that it risked derailing an economic recovery.
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Australia’s central bank has now shifted into a new phase after rate cuts were interrupted by rapidly rising consumer prices.
“We’ve made one rate rise this time, and we’ll observe now what happens to financial conditions,” Bullock said.
Bullock said she would not give guidance about future rate movements, but left the door open for more hikes should high inflation persist.
Annual inflation recently jumped to 3.8%, well outside the RBA’s 2% to 3% band.
The RBA’s economic outlook, contained in its monetary policy statement released on Tuesday, assumes headline inflation will now reach 4.2% by the middle of the year, a level not seen since 2023.
If the forecasts prove correct, consumer price growth will also take longer to come down than previously thought, reigniting – or extending – the cost-of-living crisis.
Australians who are building their own homes are already seeing steep price rises, as growing demand allowed builders to remove discounts previously on offer. Durable goods, a category that includes furniture and large household appliances, are also recording fast price rises.
Political fallout
The treasurer, Jim Chalmers, was jeered by opposition benches in parliament on Tuesday after saying the rate hike was “widely expected”, before adding that it would be “difficult news for millions of Australians with a mortgage”.
The rate announcement represents a blow to the government’s economic credentials after it took credit for bringing inflation back under control ahead of last year’s federal election.
Inflation has been fuelled in part by public and private sector spending, according to economic data.
Australia’s economic capacity and productivity are also subdued, making it difficult to keep costs under control, while the employment market has proven to be very robust.
At the same time, international pressure including Donald Trump’s tariffs have not hindered the global economy as much as once feared, reducing the need for further rate relief.
Tuesday marks the first time the RBA has hiked rates since November 2023. The RBA’s rate-setting board said the decision to hike was unanimous.
Central bank projections show that inflation could come back into the target band by mid 2027, although the data assumes the RBA will need at least one more rate hike to do so.
Economists at National Australia Bank forecast a follow-up 25 basis point hike in May, while noting there are risks of an earlier hike and the possibility of more than just one more.
VanEck head of investments and capital markets, Russel Chesler, said the central bank had no real choice but to “pull the trigger” and lift the cash rate.
“While the move was widely expected, it marks a clear escalation in the fight against inflation,” Chesler said.
