Reserve Bank hikes cash rate to 1.35 pct

RBA RATE DECISION
The RBA has announced a 50 basis point rise to the cash rate, taking it to 1.35 per cent. -AAP Image

The Reserve Bank has raised the cash rate to 1.35 per cent from 0.85 per cent at its board meeting, the third consecutive monthly increase as it tries to rein in ballooning inflation.

"Today's increase in interest rates is 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," RBA governor Philip Lowe said in a statement on Tuesday.

"The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed."

He said the board expected to take further steps "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."

RateCity estimates the rise will add $137 a month to a $500,000 mortgage, or $499 per month on a $750,000 loan.

Another hike is expected in August following the release of second quarter inflation data.

Dr Lowe said COVID-related disruptions to supply chains, the war in Ukraine and strong demand meant it would be "some time yet" before inflation was under control in most countries.

He said global factors accounted for much of the increase in inflation in Australia, but domestic factors were also playing a role, such as strong demand, a tight labour market and capacity constraints in some sectors.

"Inflation is forecast to peak later this year and then decline back towards the two to three per cent range next year."

However, he said household spending was a "source of ongoing uncertainty" which would be carefully watched by the RBA.

Anneke Thompson, chief economist at CreditorWatch, said the rise was unsurprising given projections of inflation heading towards seven per cent by the end of the year. It currently sits at a 21-year high of 5.1 per cent.

"It is highly likely that further increases in the cash rate will be announced as the RBA is probably beyond taking a 'wait and see' approach to the impact of their cash rate rises and will need to continue raising rates until they get comfortable that inflation is starting to move down."

The housing market already responded to the previous rise and will be closely watched as banks set their new higher loan rates.

The Corelogic Home Value Index for June showed house prices in Sydney and Melbourne dropped by 2.8 and 1.8 per cent respectively over the quarter, with only Adelaide trending upwards.

PropTrack senior economist Eleanor Creagh said buyer demand is already moderating, with auction volumes and clearance rates down and sales volumes slipping, along with falling prices.

"This is a rapid policy tightening and whilst high household debt and weak sentiment is a risk, these factors are offset by the tight labour market, promoting a degree of confidence and job security and hopefully, in turn, stronger wages growth," she said.

She said despite the market implicitly pricing a cash rate of three per cent by December, it was likely the cash rate will end the year "closer to two per cent than three per cent".