Finance
Homeowners dealt $3,200 hit as interest rates rise to highest level in 16 months
The Reserve Bank of Australia has conformed to expectations and decided to lift the official cash rate. It is the third successive interest rate hike this year as the bank tries to suppress expectations of runaway price inflation in the economy and subsequent wage increases.
The RBA opted for a standard 0.25 hike, which takes the official cash rate to 4.35 per cent. After hikes in February and March, it now completely erases all the rate cuts following the hiking cycle in response to Covid-driven inflation.
The official cash rate last sat at 4.35 per cent 16 months ago.
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The hike in March was a close call, with five Board members in favour and four against. This time, it was a very different story.
Only one Board member voted to hold rates steady today, with eight voting for the hike.
“There are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services. Short-term measures of inflation expectations have also risen,” the RBA Board warned in its accompanying Monetary Policy Statement on Tuesday afternoon.
“Developments in the Middle East are having an impact on inflation. Higher fuel prices are adding to inflation and there are indications that this is likely to have second-round effects on prices for goods and services more broadly. This inflation impulse is in addition to the high inflation recorded around the start of 2026, reflecting capacity pressures in the economy.”
The RBA pointed to huge uncertainty in the Middle East and said a protracted conflict would mean inflation will likely get worse before it gets better.
“A longer or more severe conflict could put further upward pressure on global energy prices; this would push up near-term inflation and could also increase inflation further out as these costs are passed through,” it said, adding this scenario risks price rises getting “built into longer term inflation expectations”.
“Higher prices and prolonged uncertainty may cause growth to be lower in Australia’s major trading partners and also in Australia,” the statement said.
That confluence of factors has some economists worried about us entering into a period of stagflation.
Average mortgage holder paying $3,200 more
Today’s hike will take the average owner-occupier variable home loan rate to 6.26 per cent.
According to Canstar, for an owner-occupier with a $600,000 mortgage and 25 years remaining at the start of this year’s hikes, the 0.25 rise today will add $91 to their minimum monthly repayments. All three hikes this year have added $272 per month, or more than $3,200 in mortgage payments this year.
But will it actually make a difference to inflation?
Ahead of Tuesday’s decision (when the market was pricing in an 80 per cent chance of a hike), Associate Professor of macroeconomics at the University of Tasmania expressed her doubts.
“Controlling inflation has become increasingly challenging for the RBA due to both external and domestic factors driving current price pressures. Global supply-side disruptions, driven by geopolitical tensions and energy market volatility, are leading to significant cost-push inflation largely beyond the reach of domestic monetary policy,” she said.
Her fellow Associate Professor of Macroeconomics at the University of Sydney agreed, but said the RBA needed to do the only thing it could, noting the Board would not want to risk people believing inflation was here to stay long-term and therefore ask for pay rises.
“The RBA cannot lower global fuel or fertiliser prices, but it can stop the shock from turning into persistent local inflation by keeping inflation expectations anchored. Higher rates can reduce second-round effects, such as firms raising prices more broadly or workers demanding larger wage increases.”
The RBA is not expecting its preferred trimmed mean inflation gauge to fall back into its target band of 2-3 per cent until the second half of 2027.
The unemployment rate is expected to stay around its current low levels until the middle of next year, then increase gradually after that.
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