Australian households will face their 12th interest rate hike as the Reserve Bank of Australia raises mortgage bills again in June. The move comes as RBA Governor Philip Lowe cites concerns over stubborn inflation and increases the cash rate target from 3.85% to 4.1%. According to RateCity’s data, this will result in a monthly increase of $76 for a typical $500,000, 25-year housing loan, leading to a total expenditure of over $1,100 since the rise began in May 2022.
Dr. Lowe stated that although inflation has peaked, it remains too high, and the interest rate hike will make the central bank more confident that price growth will fall back to target levels by mid-2025.
“Further rate hikes are designed to give people more confidence that inflation will return to target levels within a reasonable timeframe,” he said.
The Reserve Bank of Australia is particularly concerned about inflation in the service sector – essential items such as energy and rent – and warns that if wage increases in 2023 are not matched by productivity growth, it may lead to inflation.
“Although inflation in commodity prices is slowing down, inflation in service prices remains very high and has proven to be persistent overseas,” said Dr. Lowe.
“Unit labor costs are also rising rapidly, while productivity growth remains sluggish.”
In response to the rate hike, Treasurer Jim Chalmers rejected the opposition’s suggestion that the budget was to blame.
He said many Australians would find the June hike “difficult to understand.”
“Today’s rate hike is not because of the budget, and it’s not because people on the minimum wage are paid too much. We should be very clear about that,” Dr. Chalmers said in Canberra.
“Today’s rate hike is because inflation in our economy is more persistent than anyone would like, especially in areas that the budget has been carefully adjusted to address, whether it’s rent, energy, or out-of-pocket health costs,” Dr. Chalmers said.
He acknowledged that many Australians would find the decision difficult to understand and cope with but noted that the Reserve Bank would be able to explain its decision.
“The Reserve Bank’s job is to contain inflation without damaging the economy, and they will have plenty of time and opportunity to explain and defend the decision they made today,” he said.
There are differing opinions among experts on whether the Reserve Bank of Australia will raise interest rates on Tuesday. Some predict that the rate cycle will pause after a series of economic data showed a slowdown in Australian demand. However, other economists who support the rate hike believe that the central bank is too concerned that its inflation reduction plan will derail due to rapid price increases in essential items such as energy and rent. In fact, Asia-Pacific economist Karan Pikklein believes that the June hike is “inevitable” due to concerns that inflation may be more persistent than expected.
“The RBA is particularly concerned about the stickiness of inflation, especially in the services sector,” he said.
“Even as foreign sources of inflation start to fade, domestic sources of inflation appear to remain.
“If high inflation becomes entrenched as expected, then aggressive rate hikes – beyond what we have seen so far – will be needed to contain it.”
The official cash rate target has now risen more than 4 percentage points since a record low of 0.1%, with all hikes taking place in the past 13 months.
Households are clearly struggling under the pressure of growth, with Roy Morgan estimates showing more than 1.4 million homeowners are at risk of mortgage stress heading into June.
Roy Morgan claimed another 30,000 households would be at risk due to Tuesday’s rise.
Dr Lowe, who has repeatedly acknowledged the financial toll high interest rates take on households, said on Tuesday that more rates may be needed by mid-2025 to keep inflation in check.
But they are not inevitable, and key calls in July and August will be driven by incoming data.
“The Board will continue to closely monitor developments in the global economy, trends in household spending and the outlook for inflation and the labor market,” Dr Lowe said.
“The Board remains firmly determined to return inflation to target and will take the necessary steps to achieve this.”
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