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Feeling the pressure: interest rates now 1.85%, further increases expected

The Reserve Bank of Australia (RBA) has lifted its benchmark interest rate for the fourth month in a row, with the rate now sitting at 1.85 per cent.

In a post-meeting statement, RBA Governor Philip Lowe did not rule out further increases in coming months to quell inflation.

“The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy,” Mr Lowe said.

“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. 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.”

Inflation in Australia currently stands at 6.1 per cent, the highest it has been since the 90s. The RBA has placed its target range at 2- 3 per cent and has forecast CPI inflation to reach over 7 per cent over 2022 and a little above 4 per cent over 2023.

According to this month’s Finder RBA Cash Rate Survey, 100 per cent of the experts and economists polled had predicted a cash rate increase in August.

Graham Cooke, head of consumer research at Finder, said these combined hikes will cost the average Australian homeowner an additional $610 per month compared to payments in April.

“This latest hike could cost the average mortgage holder a whopping $7,300 extra per year compared to what they were paying in April,” Mr Cooke noted. “With almost a quarter of Australian homeowners already struggling to pay their mortgage in July, this news will be especially painful.”

Mark Crosby of Monash University suggests the cash rate is “well behind” where it should be.

He added, “After two more 50 bp moves, it will be time for a pause to wait for the impacts of recent rises.”

Pathfinder Consulting’s Peter Boehm predicts a cash rate of around 2.5 per cent by the end of 2022.

“The RBA has already signalled its intent and will undoubtedly follow the lead of other central banks which have increased their interest rates, in some cases by material amounts,” he elaborated. “This means there will need to be some big increases between now and then and this raises in my mind, the possibility of recession.

“Interest rate increases are unlikely to address the causes of inflation which are largely attributable to events occurring overseas and which are being imported into the Australian economy. Personal budgets are under severe pressure right now and I can see a scenario where RBA action could break them.

“Further, wage increases across the broader economy will not help – they will add to inflationary pressures which may result in business downsizing or exiting the market. It is a vicious circle.”

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READ MORE: Feeling the inflation heat: Aussies to cut back spending by 30 pct on dining and drinking in coming months

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Rhea Laxmi Nath

Rhea Laxmi Nath

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