RBA pulls the trigger: More interest rises ahead, inflation to stay higher until mid-2024
The Reserve Bank has lifted official interest rates to 0.35 per cent and confirmed that more increases would occur in the near future.
RBA Governor Philip Lowe
The 0.25 per cent increase was slightly more than economists had been expecting and was only the second time the RBA had increased the cash rate during an election campaign.
The major banks are expected to move quickly to increase their mortgage rates.
While the increase was made to temper spiraling inflation, RBA Governor Philip Lowe also warned that the cost-of-living pressures would get worse, rising to 6 per cent this year before the increased interest rates had any impact on the economy.
Lowe said it would take until mid-2024 before inflation was back to “around 3 per cent”.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Lowe said.
“This will require a further lift in interest rates over the period ahead.”
The ANZ’s David Plank said the increase was a sign of “hawkish” sentiment in the RBA and that “a move of 40 basis points in June to take the cash rate target to 0.75 per cent seems a distinct possibility”.
The debate now is likely to be about wages growth because continued high inflation will have a significant impact on that, but Lowe said the RBA’s discussions with businesses indicated that wages were picking up in the private sector, but there was as yet no evidence of that.
“Real wages growth will be under pressure for a while yet it seems,” IFM economist Alex Joiner said.
The interest rate increase gave Labor a chance to attack Prime Minister Scott Morrison on his handling of the economy, claiming that the costs of essentials “were out of control” while real wages were falling.
However, Morrison said Australians had been preparing for the increase Australians.
“Throughout the course of the pandemic we have seen them double their buffers on their mortgages and move from variable rates to fixed rates,” he said.
BetaShares economist David Bassanese said the outlook was for more increases in interest rates over this year and 2023.
He said it had to taken into account that interest rates were effectively zero to deal with the pandemic and as the economy improved a move back to higher interest rates was justified.
“How far will they go? My base case is that they will raise rates to 1.5 per cent to 1.75 per cent. That will keep the cash rate well below the average levels we have seen in the last decade or so.”
CoreLogic’s Tim Lawless the extent of any housing market downturn depends on how high and how fast interest rates rise, but also a variety of other factors.
“Labour markets are currently showing the lowest unemployment rate since the mid-1970s, and conditions are set to tighten further. Such a low unemployment rate, along with an expectation for higher income growth, should keep mortgage distress and forced sales at relatively low levels.
“Additionally, as we enter a period of higher interest rates, borrowers are generally well ahead of their mortgage repayments.”