The Reserve Bank of Australia has moved to rein in inflation with another cash rate increase of 50 basis points.
Cash rates have increased from 0.35 to 0.85 per cent, which will add another $2000 to the average homeowner’s mortgage repayments per annum.
At today’s monetary policy meeting the Reserve Bank of Australia Board decided to boost cash rates to curtail inflation pressures in the economy, and warned more hikes were on the way.
“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” RBA Governor Philip Lowe said.
“The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
AMP chief economist Shane Oliver said the RBA remained hawkish, foreshadowing more hikes.
Oliver said he expected rates would peak between 2 and 2.5 per cent next year.
The increase in cash rates could encourage more investors into the property market according to SQM Research managing director Louis Christopher.
“In times of higher inflation, people do look towards real estate as a hedge against the devaluation of money,” Christopher said.
“With rents rising by 15 per cent across the country over the past 12 months, investors will be keeping an eye out for bargains, a good rental yield and with the chance to lift rents further in time.”
While most economists had anticipated a rates rise, few had forecast a 50 basis point rise.
Moody’s assistant director Harry Murphy Cruise said the hefty cash rate hike was “as much about managing expectations as it is taking heat out of the buoyant economy”.
“Short-term inflation expectations are rising and the RBA needs to tame those gains,” he said.
“The speed of further interest rate normalisation will rely on how well businesses and families react to these higher borrowing costs, as well as the pace of real wage gains."
Finder head of consumer research Graham Cooke said this month's cash rate hike would slug homeowners almost $2000 per annum extra.
“The past few years have seen a huge number of buyers flood into the market, with rock-bottom interest rates … those days are certainly over,” Cooke said.
“The average homeowner will see their monthly repayments jump $159 - equivalent to $1907 per year from this increase alone, with more to come.”
Lowe said economic uncertainty surrounded household spending with higher inflation but the economy was in a good position with a strong pipeline of construction work.
“Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending,” he said.
“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.”