Key points
- The Reserve Bank of Australia is has announced a cash rate rise to 0.85 per cent
- It comes after the RBA’s decision in May to lift the rate to 0.35 per cent from a record low of 0.1 per cent
Treasurer Jim Chalmers has described the Reserve Bank of Australia's decision to lift the cash rate to 0.85 per cent as "very difficult news" as Australian homeowners face the largest hike since 2000.
The announcement of the 0.5 percentage point rise came after the RBA's monthly board meeting and is the second hike in as many months, after the rate was kept at a record 0.1 per cent between November 2020 and April this year.
The RBA board said the rise was "a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic" and signalled that it expected to take "further steps in the process of normalising monetary policy conditions in Australia over the months ahead".
The RBA also increased the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points.
Westpac was the first of the banks to pass on the hike, lifting its variable interest rates by the full 0.5 percentage points.
'Inflation will get harder before it gets easier'
"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," Mr Chalmers said.
"This will be very difficult news for all of those Australians who are already facing skyrocketing costs of living in this country."
"It is the universal expectation across economists and government and the Reserve Bank that this inflation challenge will get harder before it gets easier."
Mr Chalmers also said the government would "do what it can" to alleviate price pressures on Australians.
"There is some cost-of-living relief in the budget as it stands and our responsibility as the new government is to make sure in the October budget ... that there is a cost package that includes our policies on childcare and medicines but also to get that longer-term downward pressure on energy prices and real wages moving," he said.
"This cost of living crisis has been brewing for the best part of a decade."
"We want to work with Australians, we want to work with all parts of our economy to do what we can to get on top of this inflation challenge and the interest rate rises that accompany it."
What has the Opposition said?
The Coalition's treasury spokesperson Angus Taylor described it as a "really tough day" for anybody with a mortgage.
"The one thing a government can do to reduce pressure on inflation and interest rates is to manage its finances well," he said.
Opposition treasury spokesperson Angus Taylor described it as a "really tough day" for homeowners. Source: AAP
How do homeowners feel?
Sydney homeowner Russell Lee purchased his apartment in December 2021, and initially opted for a variable rate.
Shortly afterwards, when his bank had preemptively wanted to increase his rates, he was able to liaise with his mortgage broker to secure a fixed rate of 3.49 per cent for the next three years.
"I'm definitely very happy with the decision, it's just not worth the hassle of ... the situation with the increasing rates," he told SBS News.
"If my mortgage repayments were to go up by a lot, it could set me in financial hardship. I am a solo income earner, I live in this house and I finance the mortgage alone."
Despite being secure with his fixed rate for the next three years, Mr Lee says he is currently trying to save a buffer in anticipation of rates increasing again.
“Who knows, in the next time, when that term expires, what the interest rate will be and what could happen there, especially with wages not really increasing too much."
What you'll pay if banks follow the RBA
If your mortgage is (size, new monthly repayments, increase):
- $300,000 - $1660.33 - $91.77
- $350,000 - $1937.05 - $107.06
- $400,000 - $2213.77 - $122.36
- $450,000 - $2490.49 - $137.65
- $500,000 - $2767.22 - $152.95
- $550,000 - $3043.94 - $168.24
- $600,000 - $3320.66 - $183.54
- $650,000 - $3597.38 - $198.83
- $700,000 - $3874.10 - $214.13
This assumes a 30-year standard variable rate loan at an average new interest rate of 5.27 per cent.
What has the RBA said?
In a statement, RBA Governor Philip Lowe acknowledged inflation in Australia has increased significantly, and said it was higher than was previously expected.
"Global factors, including COVID-related disruptions to supply chains and the war in Ukraine account for much of this increase in inflation," he said.
"But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices."
The cash rate rise in May 2022 was the first hike in over a decade. Source: SBS News
The announcement, which came after the RBA's monthly board meeting on Tuesday, is the second of its kind in as many months.
In May, the RBA made the decision to lift the rate to from a record low of 0.1 per cent — the first hike in over a decade.
Consumers 'increasingly pessimistic'
The weekly ANZ-Roy Morgan consumer confidence index — a pointer to future household spending — was also released on Tuesday, which is now at its lowest level since mid-August 2020, down 4.1 per cent for the week.
"Consumers are especially pessimistic about the current economic outlook and their current financial circumstances," ANZ head of Australian economics David Plank said.
The Australian Institute for Petroleum said the national average petrol price was down 3.1 cents in the past week to 196.9 cents per litre, ending six weeks of consecutive increases.
However, such modest relief could prove short-lived with global oil prices on the rise again and wholesale petrol prices already near 190 cents a litre.
Persistent talk of a "gas crisis" is also likely to undermine sentiment.
