The Reserve Bank of Australia raised the interest rate for the first time in more than a decade in response to soaring inflation.
Governor Philip Lowe announced that the cash rate had been raised by 25 basis points to 0.35%.
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“The Board felt the time was right to start withdrawing some of the extraordinary monetary support that had been put in place to help the Australian economy during the pandemic,” he said in a statement.
“The economy proved resilient and inflation rose faster and higher than expected.
“There is also evidence that wage growth is accelerating. Given this and the very low level of interest rates, the process of normalizing monetary conditions should be initiated.
Lowe said the decision was largely based on labor market forecasts.
“The resilience of the Australian economy is particularly evident in the labor market, with the unemployment rate falling in recent months to 4% and labor force participation reaching an all-time high,” he said.
“Jobs and vacancies are also at high levels. The central forecast is for the unemployment rate to drop to around 3.5% at the start of 2023 and stay around that level thereafter. That would be the lowest unemployment rate in nearly 50 years.
More rate hikes expected
Lowe said the move would bring high inflation back to level – and hinted that further rate hikes were all but guaranteed.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
“This will require further interest rate hikes over the coming period. The Board will continue to closely monitor incoming information and changes in the balance of risk as it determines the timing and the magnitude of future interest rate increases.
Last Wednesday, the Australian Bureau of Statistics announced that inflation had reached 5.1%, its highest level in more than 20 years.
This was spurred by rising cost of living pressures, primarily soaring gasoline prices and home construction.
What does a rise in interest rates really mean?
Simply put, rising interest rates make borrowing more expensive.
This means that for people with a mortgage, their repayments are higher.
But it can also lead to higher returns on savings and on retirement, both of which generate interest on growth, according to Peter Swan, professor at the UNSW business school.
The RBA uses interest rates to manage inflation rates.
When borrowing becomes too expensive, the demand for goods and services may decline, lowering the overall cost.
ANZ was the first of the big four banks to call for a cash rate hike.
“Inflationary pressures have grown and widened,” he tweeted last week.
“A cash rate target of 0.1% is inappropriate in this context.”
He predicted that the RBA would raise the cash rate by 0.15%.
Cash Rate Calculator
According to the Mortgage Rate Change Calculator Mozosomeone with a principal and interest loan with an interest rate of 3.5% of $500,000 with 25 years remaining would pay $68 more per month on their mortgage now that the RBA has raised the cash rate by 0.25%.
A person with the same conditions, but with a loan of $750,000, would pay $101 more per month, while a person with a loan of $1,000,000 would pay $135 more per month.
To calculate your exact rate change, click here.
HSBC chief economist Paul Bloxham said the RBA’s move could put it in the eye of a political storm.
“The RBA is independent and will no doubt act as it sees fit to achieve its mandate,” he said.
“But raising the exchange rate 18 days before an election – the first hike in more than a decade – would put the RBA right in the political mix.”
The last time the interest rate was raised during an election campaign was in 2007, a poll that former Liberal Prime Minister John Howard lost after campaigning on lower interest rates under his government.
Prime Minister Scott Morrison spoke shortly after the announcement, saying the government had worked closely with the RBA throughout the pandemic.
“One of the hallmarks of the success of the pandemic was that government policy was aligned with Reserve Bank policy decisions,” he said, alluding to JobKeeper and JobSeeker.
“The RBA supported what we were doing, and vice versa.
“Our responses worked to support what the Reserve Bank was doing.”
Labor leader Anthony Albanese almost immediately released a statement after Tuesday’s rate decision.
“It was hard enough to make ends meet under Scott Morrison and today it has become even harder for millions of Australians,” he said.
“Even before today’s decision, Australians were facing a real cost of living crisis on his watch.
“Scott Morrison’s economic credibility was already in tatters, now it’s completely shredded.”
Three of the big four banks expected cash rates to rise before Tuesday.
But the Commonwealth Bank suggested another month could offer more clarity on the state of the economy.
“What could happen is that the Reserve Bank decides to do nothing for another month,” CommSec’s Steven Daghlian told 7NEWS.
“It’s because in two and a half weeks we get a key wage growth update, we have the election after that, a key economic growth update in early June.”
Young people who do not own a home are unlikely to be significantly affected by the RBA’s decision.
Economists and industry experts have told 7NEWS.com.au that the higher cost of a mortgage is unlikely to pass on to tenants.
“It’s a common misconception that higher interest rates will lead landlords to increase rents,” Cameron Murray, a researcher at the University of Sydney’s Henry Halloran Trust, told 7NEWS.com.au.
“And, of course, they can try that.
“But you have to remember that ultimately the rental price is determined by the rental market and not by the cost to landlords.
“We know that because most homeowners don’t have big mortgages, most homeowners make a lot of money, and only a few recent buyers may have big mortgages.”