RBA hikes cash rate by 50 basis points, Chalmers flags “cost of living package” in October budget

The Reserve Bank of Australia (RBA) has increased the cash rate by 50 basis points today, bringing it up to 85 basis points, or 0.85%. The interest rate on exchange settlement balances is also up by 50 basis points to 75. 

According to a statement made by RBA governor Philip Lowe, the rate rise reflects the withdrawal of pandemic-era monetary support. 

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. Given the current inflation pressures in the economy, and the still very low level of interest rates, the board decided to move by 50 basis points today.”

The rate rise comes at the heels of a significant increase in inflation which, while lower than other advanced economies, is higher than expected. 

Lowe says global factors, including supply chain disruptions caused by COVID-19 and Russia’s war in Ukraine played a significant role. Domestic factors like capacity constraints, a stretched labour market and the floods were also contributors. 

And the RBA doesn’t expect the pressure to subside in the short-term.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” Lowe said. 

Not until next year is inflation expected to decline back to the 2% to 3% range once commodity prices stabilise and supply-side problems are resolved. 

While Lowe noted the economy was resilient and the labour market was strong, household spending was uncertain due to inflationary pressures on household budgets and interest rate increases. 

“While the central scenario is for strong household consumption growth this year, the board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy,” he said. 

The latest rate rise follows a 25 basis point increase announced last month from 0.1% to 0.35%, the first time interest rates were raised in 11 years. It is expected rates will continue rising throughout the year, with experts expecting it to reach 2.5-3% in two years. 

With the days of low interest loans behind, at a press conference today Treasurer Jim Chalmers acknowledged that families and homeowners will see additional cost-of-living pressures.

“For an average mortgage of $330,000 remaining, it’s about $87 a month that Australian homeowners will have to find. For an average new mortgage, it’s almost twice that, at about $157 a month,” he said.

He added that there will be a “cost of living package” in the October budget, which will aim to apply long-term downward pressure on energy prices and facilitate real wage increases. 

Meanwhile, Anneke Thompson, chief economist at CreditorWatch, says the rate increase reflected the RBA’s concerns around rising prices across the economy.

She added that the RBA will need to balance a number of factors — including the cost of living and employment issues, including wages, against inflation.