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Another brute of a rate rise as Treasurer warns - this will bite

Business

The Reserve Bank hiked interest rates another 50 basis points (0.5 per cent) and warned that there was more to come as it turns off the money tap to the Australian economy.

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The increase brings the cash rate to 1.35 per cent and means banks were likely to pass on the cost to home loan borrowers. It was the second consecutive rise of 50 basis points and the third increase in three months.

ANZ today tipped another hike of 50 basis points would occur in August.

Treasurer Jim Chalmers said the increase would mean an average homeowner owing $500,000 on their mortgage would have to find another $137 a month in repayments while also trying to keep up with rising electricity, petrol and food prices.

If the banks pass on the latest rise the total increase in interest rates this year would add about $330 a month to the $500,000 mortgage.

“Rates were expected to rise, and they’re expected to bite,” Chalmers said.

“While the trajectory of rising interest rates was set before the election, this rate rise is another blow to workers and families already under significant cost of living pressure.

“Today’s 50 basis point rate rise comes at a time when a significant number of Australians are confronted by yet another large-scale natural disaster, which will only add to these ongoing challenges.

“That’s why we’re working hard to deliver on our commitments to boost the capacity of the economy and reduce the cost of living, and why we fought for an increase to this year’s minimum wage for 2.8 million Australians.”

RateCity said digital loans were offering a cheaper alternative to the major banks.

“In some instances, the digital home loan offers a saving of 22 basis points for your home loan repayments for owner-occupiers and 49 basis points for investors switching from a big four bank rate,” RateCity said.

Economist Stephen Koukoulas said it would be better for the RBA to front load the rate hikes to get policy to where it’s needed sooner rather than later.

“Given the outlook for inflation and unemployment a 2.5-3 per cent cash rate is needed. The RBA knows this but it’s pussy-footing around,” he said.

Former Labor Minister and economist Craig Emerson said the RBA had been wrong to hold rates at a higher level before the pandemic in anticipation of a wages breakout.

“Its pandemic easing was right, but it was wrong to state it would keep the cash rate at 0.1 per cent until 2024. Now it’s going too hard. Much of our inflation in transitory,” Emerson said.

RBA Governor Philip Lowe also indicated there was concern about how Australians would use the extraordinary financial buffer households had built up over the Covid era.

Lowe said household spending was a source of “ongoing uncertainty” because household budgets were under pressure from higher prices and higher interest rates.

“Housing prices have also declined in some markets over recent months after the large increases of recent years. The household saving rate remains higher than it was before the pandemic and many households have built up large financial buffers and are benefiting from stronger income growth. The board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.

Lowe said today’s increase in interest rates was a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic.

“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.

“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.”

 

 

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