The Reserve Bank has hiked interest rates by another 25 basis points – marking the 12th increase in little more than a year, blaming a big boost in award wages for fuelling inflation.
The cash rate has now risen to an 11-year high of 4.1 per cent and will add $97 to monthly repayments on a typical $600,000 mortgage.
The 12th rate rise since May 2022 is the most rapid successive increase since 1989, and borrowers can expect yet more pain in coming months, with loan repayments surging by 62 per cent in just 13 months.
Reserve Bank Governor Philip Lowe said the rises must continue because inflation was still too high, and noted that big award wage rises coming into effect next month will only make that worse.
‘Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,’ he said in a statement on Tuesday.
Dr Lowe said this would be far from the last rate rise even though annual inflation in the March quarter had moderated to 7 per cent, down from a 32-year high of 7.8 per cent in the December quarter.
But it’s still well above the Reserve Bank of Australia’s two to three per cent target, with Dr Lowe expecting the consumer price index to remain high for two more years.
‘Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,’ Dr Lowe said.
Treasurer Jim Chalmers said the rate rise would make life harder for borrowers.
‘This is a difficult day for Australians regardless,’ he said.
‘This will make life much harder for people with a mortgage.’
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The Reserve Bank of Australia has hiked interest rates by another 25 basis points – marking the 12th increase in little more than a year
Dr Lowe warned wages growth without productivity improvements could keep inflation high, noting the Fair Work Commission’s big increase in award wages for more than 2.5million workers, coming into effect on July 1.
‘Wages growth has picked up in response to the tight labour market and high inflation,’ he said.
‘Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year.
‘At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.’
But Dr Chalmers was adamant the Reserve Bank and Treasury secretary Steven Kennedy were not worried about a wage-price spiral.
Under such a scenario, wage rises to cover inflation only leads to more price increases.
‘Whether it’s the Reserve Bank or the Treasury secretary or the Fair Work Commission, they’ve also made it clear that they don’t see a wage-price spiral in the economy,’ the Treasurer said.
‘This rate rise today is not because of the Budget, it’s not because people on the minimum wage are being paid too much.’
Shadow treasurer Angus Taylor said Labor policies were to blame for this latest rate rise, not Russia’s Ukraine invasion pushing up petrol prices.
‘Let’s be clear, this is Labor’s rate rise. This rate rise belongs to the government,’ he said.
‘It is clear inflation is coming from Canberra, not from the Kremlin, not from anywhere else, but it is coming as a result of a cocktail of policies that we’ve seen from Labor, fiscal policy, energy policy, industrial relations policy, which are combining to create an inflationary fire.’
The Commonwealth Bank’s head of Australian economics Gareth Aird said the big pay rise for the low-paid was to blame for Tuesday’s rate rise.
‘We attribute the rate hike today primarily to the Fair Work Commission’s decision, delivered last Friday, to increase the award rates of pay by 5.75 per cent, effective from 1 July 2023,’ he said.
Governor Philip Lowe said inflation was still too high following the latest interest rate rise
The Commonwealth Bank’s head of Australian economics Gareth Aird said the big pay rise for the low-paid was to blame for Tuesday’s rate rise
Australia’s 184,000 minimum wage workers will, from July 1, receive an 8.6 per cent boost, equating to $70 a week for those putting in full-time hours.
The Fair Work Commission last week also gave another 2.5million workers on awards a 5.75 per cent pay rise from the start of next month.
While the industrial umpire is independent, Prime Minister Anthony Albanese’s Labor government had called on it to ensure minimum wage workers had a pay rise at least in line with inflation.
This is occurring as the NSW Labor government scraps a 2.5 per cent wages cap for public sector workers as Victoria gets rid of its equivalent 1.5 per cent ceiling.
The latest 0.25 percentage point increase means a borrower with an average $600,000 mortgage will pay an extra $97 every month.
Monthly repayments will climb to $3,730, up from $3,633, as a Commonwealth Bank variable rate for a borrower with a 20 per cent deposit rose to 6.34 per cent, up from 6.09 per cent.
The average borrower will now be paying $17,088 more a year than they were 13 months ago, when the RBA cash rate was still at a record-low of 0.1 per cent and the banks offered mortgage rates with a ‘two’ in front.
Monthly repayments are now 62 per cent higher than early May 2022, when they were at $2,306.
Treasurer Jim Chalmers said the rate rise would make life harder for borrowers but denied the latest rate rise had anything to do with the increase in the minimum wage
Borrowers have now copped 12 interest rate rises since May 2022, marking the most severe pace of monetary policy tightening since the era of the RBA target cash rate began in 1990.
During this tightening cycle, there have only been pauses in April and January – a month when the RBA doesn’t meet.
The last times rates rose this rapidly, they did not stop until hitting 18 per cent, taming inflation but ushering in an economic recession, as few workers or mortage holders had any spare money to spend.
Dr Lowe argued that putting up rates now to tame inflation was very necessary and would prevent even worse outcomes down the line.
‘High inflation makes life difficult for people and damages the functioning of the economy,’ he said.
‘It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
‘And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.’
Dr Lowe warned wages growth without productivity improvements could keep inflation high (pictured is a Sydney bartender)
However AMP chief economist Shane Oliver said there was a risk the rate rises could go too far.
‘Each incremental rise in interest rates brings us closer to recession,’ Dr Oliver told Daily Mail Australia.
‘We know from the late 80s, early 90s – when interest rates went up dramatically, a bit like now, everything’s okay until it’s not.
‘Then you suddenly find you’re in recession.
‘I must admit I am getting quite worried about the outlook.’
Deutsche Bank chief economist Phil O’Donaghoe, who correctly predicted Tuesday’s rate rise, is forecasting further increases in August and September that would take the cash rate to 4.6 per cent, which would be the highest since November 2011.
Unemployment in April rose slightly to 3.7 per cent, up from a 48-year low of 3.5 per cent.
An increase in unemployment would reduce the need for businesses to hike wages to attract workers, thereby dampening inflation.
‘The board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment,’ Dr Lowe said.
Dr Oliver said while only a small number of workers were on the minimum wage, the huge increase would encourage the 35 per cent of Australian workers employed under collective enterprise bargaining agreements to demand higher wages.
‘The problem is there’s an influencing effect,’ he said.
‘That will influence wage demands right through the economy and therefore run the risk that we’ll end up with much higher wages growth than the RBA is comfortable with.’