The Reserve Bank has delivered a pre-Christmas rate rise, capping off the year’s aggressive tightening cycle by taking the official cash rate to a 10-year high of 3.1 per cent.
RBA governor Philip Lowe said the bank’s board decided to raise interest rates by a quarter of a percentage point as it worked to bring inflation under control.
If the banks pass the RBA’s increase on in full, the average discounted mortgage rate will rise to 6.45 per cent. In April, the average was around 3.45 per cent.
The Reserve Bank started lifting the cash rate from its historic low of 0.1 per cent in May after inflation began to surge. The cumulative lift in interest rates, on a $750,000 mortgage, has added $1418 to monthly mortgage repayments.
Inflation is currently at 7.3 per cent, and the bank expects it to peak around 8 per cent by the end of the year before falling through 2023.
Lowe said inflation in Australia remained too high, noting it was being pushed up by global factors as well as strong domestic demand.
“Returning inflation to target requires a more sustainable balance between demand and supply,” he said.
Lowe said the jobs market remained very tight, with unemployment at 3.4 per cent while both job ads and job vacancies were both still at “very high levels”.
He said given the importance of avoiding a “prices-wages spiral”, the bank was focused on both any lift in labour costs and whether businesses were able to pass on higher than normal price increases to consumers.
A key issue for the bank is the length of time its rate rises will take to slow the economy.
Lowe said the RBA realised rate rises acted with a lag.
“Household spending is expected to slow over the period ahead, although the timing and extent of this slowdown is uncertain. Another source of uncertainty is the outlook for the global economy, which has deteriorated,” he said.
“The board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios.
“The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.”
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