Reserve Bank of Australia Slows Down Its Tightening Policy With 0.25 Percent Rate Rise in October

Pedestrians walks past the Reserve Bank of Australia in Sydney, Australia, on June 4, 2019. Peter Parks/AFP via Getty Images

The Reserve Bank of Australia (RBA) has announced the sixth consecutive interest rate hike at its board meeting on Oct. 4, lifting the official cash rate to 2.6 percent.

Prior to the meeting, the RBA said it would opt between a 0.25 percent and 0.5 percent rate rise. It eventually chose the former option, which went against many experts’ expectations of a higher rate hike.

RBA Governor Philip Lowe said the central bank was aware that it had raised the cash rate substantially in a short period of time.

“Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia,” he said in a statement.

Lowe then reiterated the RBA’s commitment to bring inflation down to the two to three percent target band and said that the latest interest rate increase would help achieve this goal.

He then noted that the RBA was likely to make further rate hikes in the upcoming period.

Governor of the Reserve Bank of Australia Philip Lowe speaks during a press conference in Sydney, Australia, on May 3, 2022. Louie Douvis–Pool/Getty Images

According to the financial comparison website RateCity, the latest rate increase would cause an Australian household with a typical home loan of $750,000 (US$486,000) on a 25-year term to pay an extra $110 per month. The difference would go up to $1,030 if compared to six months ago when interest rates were still at record lows.

Speaking about Australia’s inflation situation, the governor said the RBA expected it to continue to rise and reach 7.75 percent by the end of 2022 before dropping to a little above four percent in 2023 and around three percent in 2024.

Fears of A Recession

Before the RBA announced its interest rate decision, economists had warned about a potential recession.

AMP Capital’s Shane Oliver said that aggressively raising interest rates would risk pushing the Australian economy into an avoidable downturn.

He said in comments obtained by AAP that compared to the mid-1990s, Australia now had much higher levels of debt-to-income ratio and that households were currently much more sensitive to rate hikes.

PropTrack senior economist Eleanor Creagh said the property market bore the brunt of rapid rate rises as the national housing prices were now 3.35 percent lower than their March peak.

“As borrowing capacities are constrained, and buyer’s budgets shrink, the most expensive markets of Sydney and Melbourne have led the price declines,” Creagh said.

Meanwhile, Treasure Jim Chalmers said the less than expected rate increase would still make life difficult for Australians.

“Just because this [rate rise] is a bit less than what many people were anticipating ... won’t make it that much easier for Australians to find room in their household budgets to meet the increasing costs of servicing the mortgage,” he told reporters.

Likewise, Shadow Treasurer Angus Taylor said the rate rise was still significant and would add pressure on the budget of many Australians with mortgages.