Reserve Bank of Australia Raises Cash Rate to 1.35 Percent, Warns More Expected to Come

A general view of the Reserve Bank of Australia building in Sydney, Australia, on May 3, 2022. (Brook Mitchell/Getty Images)

The Reserve Bank of Australia (RBA) has lifted the cash rate by another 0.5 percent to 1.35 percent at its board meeting on July 5, continuing its effort to bring inflation under control.

In a statement released after the meeting, RBA governor Philip Lowe said the central bank’s move was necessary to end the unconventional monetary policy implemented following the COVID-19 pandemic.

“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 ensure the Australian economy against the worst possible effects of the pandemic,” he said.

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

Lowe then added that the RBA board was likely to take “further steps” in the upcoming months to bring the monetary conditions in Australia back to normal.

“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,” he said.

It was expected that the next cash rate hike would come in August after the release of second-quarter inflation data.

Domestic Factors Drive Up Australia’s Inflation

Speaking about the economic situation, the governor said that although inflation in Australia was high, it had not reached the levels seen in other countries.’

Additionally, while global factors were responsible for much of the rise in inflation in the country, domestic factors such as strong demand, a tight labour market, and capacity constraints in some sectors were adding to the pressures.

“Inflation is forecast to peak later this year and then decline back towards the two to three percent range next year,” Lowe said.

“As global supply-side problems continue to ease and commodity prices stabilise, even if at a high level, inflation is expected to moderate.”

Reserve Bank Governor Philip Lowe speaks at Parliament House in Canberra, Australia on Feb. 7, 2020. (Tracey Nearmy/Getty Images)

Meanwhile, the lift in the cash rate was in line with what economists and markets had expected earlier.

“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,” said Anneke Thompson, the chief economist of CreditorWatch.

A ‘Tough Day’ For Homeowners With Mortgages

Earlier, Treasurer Jim Chalmers had warned Australians of a “tough day” as the interest rate hike would bite into household budgets.

“A bigger proportion of household budgets which are already stretched by the price of petrol, groceries, electricity and other essentials will be eaten up by mortgage repayments,” he told Sky News.

“People will find today’s news really difficult. I think it will be a tough day for a lot of homeowners.”

Financial comparison website RateCity estimated the 0.5 percent increase in interest rate would cause a homeowner with a $500,000 (about US$343,000) mortgage to pay an additional $137 a month.

At the same time, the treasurer said the RBA’s decision would put more pressure on the federal budget and the economy.