The Reserve Bank has implemented an increase of 0.25 percentage points in interest rates, indicating the possibility of additional increments if the inflation continues to persist at high levels.
The cash rate target saw an increase to 4.1% in June, marking a ten-year record. This move is likely to increase the financial pressure on many Australians, particularly those with mortgages, as they’ve been grappling with bill increases for over a year now.
For a typical home loan of $500,000 spanning 25 years, the increase implies an additional $76 per month. This means that since May 2022, the total monthly burden has risen by more than $1100.
Philip Lowe, the RBA governor, explained that the June rate hike decision was driven by concerns over sustained high service inflation due to rising wages and significantly low productivity growth.
He stated that although Australian inflation has peaked, its current rate of 7% is still exceedingly high and it will be a while before it reverts back to the target range. He further mentioned that this additional increase in interest rates aims to ensure that inflation returns to the target within an acceptable timeframe.”
Impact of a 0.25% point hike to 4.1% cash rate: increase to monthly repayments
While opinions varied among experts regarding the RBA’s potential rate hike in June, with some anticipating a temporary halt in the rate cycle following a series of data indicating a slowing demand across Australia, others posited that the RBA’s concerns over fast-rising essential costs, such as energy and rent, would potentially disrupt their inflation reduction plan, leading to an increase.
Since hitting a record low of 0.1%, the cash rate target has seen a significant rise of over 4 percentage points, with all increments taking place within the past 13 months.
This escalating trend is proving burdensome for households, as Roy Morgan’s estimates indicate that over 1.4 million homeowners were facing potential mortgage stress as we entered June. It is suggested that today’s rate increase will place an additional 30,000 families at risk.
RBA’s governor, Dr. Lowe, acknowledging the financial hardship inflicted by higher rates on families, suggested that further rate hikes may be necessary to control inflation by mid-2025, though he also stated that they are not guaranteed. The crucial decisions to be made in July and August will be informed by incoming data.
He emphasized that the Board’s focus will remain on global economic developments, trends in household expenditure, and projections for inflation and the job market. Dr. Lowe affirmed the Board’s unwavering commitment to restoring inflation to its target and their willingness to take necessary measures to achieve this.
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