Reserve Bank of Australia raises cash interest rate by 50 basis points to 0.85 percent

The Reserve Bank has shocked the market with the magnitude of its second consecutive rate hike. Here’s what it means for borrowers and renters.

The Reserve Bank of Australia has shocked the market again with a 50 basis point jumbo rate hike to 0.85 percent.

Governor Philip Lowe announced a second super-large hike in five weeks on Tuesday as the RBA continues to strip the country of the emergency loan institutions that fueled the economy during the pandemic.

The RBA was widely expected to announce its first back-to-back hike in 12 years to quell inflationary pressures driving up the cost of food, fuel and electricity.

The only question left was how hard Governor Dr. Lowe and his board were willing to go, with economists’ forecasts typically split between a 25 or 40 basis point increase.

Some had envisioned a 50 basis point hike, but the biggest rate hike since 2000 came as a surprise.

The Australian stock market plunged a staggering 1.7 percent on the news, while the Australian dollar jumped short to 72.20 cents.

In his monthly statement, Dr. Lowe cited the worrying strength of inflation as the driver of the increase, but also pointed to a strong Australian economy, a solid labor market and a rebound in business investment as reasons to be positive.

“The resilience of the economy and higher inflation mean that this extraordinary support is no longer needed,” said Dr. lowe.

He admitted that electricity and gas prices are on the rise and recent increases in gasoline mean inflation is likely to be higher in the near term than expected a month ago.

“However, today’s rise in interest rates will help inflation return to target over time.”

Sean Langcake, head of macroforecasting at BIS Oxford Economics, said the move indicates the RBA is placing much greater weight on bringing inflation back to target range, and is pleased that the labor market recovery will weather higher rates.

“They have identified slower household consumption growth due to faster inflation and higher interest rates as the main risk to the outlook – faster rate hikes add to this downside risk,” Mr Langcake said.

The RBA board is engaged in a delicate balancing act that requires it to move fast enough to bring inflation under control, without stifling the economy.

Last month, it marked the first rate hike in more than 11 years as it rose from 0.1 percent to 0.35 percent, right in the middle of the federal election campaign.

That shift was stronger than expected and Martin Place has once again set foot on the ground.

Tuesday’s move continues what is expected to be a long cycle of rate hikes in the coming months that, as they tackle consumer prices, will also push up mortgage costs.

Many also expect borrowers to pass some of this stress on to people who rent their homes.

“While the increase in monthly repayments has been relatively moderate this month, homeowners should prepare for significant increases in the coming months,” said research director Sally Tindall.

“These rate hikes will not magically cure Australia’s inflation problems. The RBA will need to rise again, possibly as early as next month and from there they could continue to rise thick and fast to get inflation under control.

Improving the cost of living has been the focal point of the Australian political landscape for months, and treasurer Jim Chalmers warned on Tuesday that the situation “would get worse before it gets better”.

“It’s no use mincing words,” said Mr Chalmers.

“Our job as a government is to ensure that, after some of this short-term emergency aid runs out, it is replaced with responsible, sustainable support for the long-term cost of living in areas such as medicine and childcare, thus increasing the energy bills will go down over time and real wages will start moving again.”

dr. Lowe said one source of uncertainty about the economic outlook is household spending and how it will hold up.

He noted that house prices have fallen in some markets in recent months but remain more than 25 percent higher than before the pandemic, supporting household wealth and spending.

“Household savings also remain higher than before the pandemic and many households have built up large financial buffers,” said Dr. lowe.

“While the central scenario is for strong household consumption growth this year, the Governing Council will pay close attention to these various influences on consumption when assessing the appropriate monetary policy setting.”

The administration will no doubt also pay close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on energy and agricultural commodity prices.

There are also lingering uncertainties regarding Covid-19, especially in China.

Originally published as Reserve Bank of Australia, spot interest rates rise as much as 50 basis points to 0.85 percent

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