Australian Official Cash Rate Rise to 1.85 Percent

A pedestrian walks past the Reserve Bank of Australia building in Sydney, Australia, on May 3, 2022. Brook Mitchell/Getty Images

The Reserve Bank of Australia (RBA) has raised the official cash rate to 1.85 percent with another 0.5 percent increase, in line with market expectations.

Following the board meeting on Aug. 2, RBA governor Philip Lowe said in a statement that the recent rate hikes were necessary to bring inflation down and balance demand and supply in the Australian economy.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” he 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 RBA is trying to reduce inflation from the current 6.1 percent–the highest level since the 1990s–to the target band of two to three percent.

According to the RBA’s central forecast, the annual inflation rate is expected to hit 7.75 percent by the end of 2022 before falling back to over four percent in 2023 and around three percent in 2024.

Governor of the Reserve Bank of Australia Philip Lowe makes a speech in Sydney, Australia, on March 19, 2020. Brendon Thorne/Getty Images

The governor said household budgets were under pressure due to higher inflation and interest rates, while consumer confidence and house prices were dropping.

“Working in the other direction, people are finding jobs and obtaining more hours of work,” he said.

“Many households have also built up large financial buffers, and the saving rate remains higher than it was before the pandemic.

“The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.”

Another Tough Day For Australian Homeowners

Speaking about the latest interest rate increase, Treasurer Jim Chalmers told the parliament it was another challenging day for Australian homeowners.

“It’s not a shock to anybody, but it will still sting,” he said.

“Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures like higher grocery prices and higher power prices and the costs of other essentials.”

Chalmers said the Labor government would concentrate on what it could responsibly influence.

“Australians know that we are in for a difficult time ahead when it comes to the storm clouds in our economy, but we are confident that we will emerge on the other side of this stronger than before.”

Meanwhile, Eleanor Creagh, a senior economist at PropTrack, said the recent rate hikes were the fastest increase since 1994.

“How household spending holds up against a backdrop of higher inflation and falling house prices versus savings and wealth buffers, and hopefully stronger wages growth, will be crucial in determining the loss of conditions in the economy and how high and fast the cash rate rises.”

Mortgage And Business Defaults Expected To Rise

Regarding the effect of the rate hikes in the past four months, the financial comparison website RateCity said a homeowner with a $500,000 (about US$344,000) mortgage at the start of May, with 25 years remaining, had to pay an additional $472 in interest every month.

In addition, Anneke Thompson, chief economist at CreditorWatch, expected the rate of default by Australian small businesses to climb by one percentage point in 2023.

Surfers Paradise in Queensland and Auburn in New South Wales are potential hotspots for mortgage defaults, with debt problems mounting on local businesses.