The RBA goes hard and fast on interest rates
The RBA's decision to increase the cash rate by 50 basis points surprised many, given the current economic climate. However, with inflation rising and unemployment remaining low, the RBA has decided that now is the time to act.
The official cash rate has now hit 1.35% and marks the third successive rise this year, after the RBA took the cash rate off a record-low 10 basis points, hiking it by 25 basis points in May. The RBA has signalled that further increases may be required in order to maintain economic stability. This is likely to put upward pressure on mortgage rates, which will impact household budgets. Nevertheless, the RBA remains confident that the economy can handle higher interest rates and that the benefits of a stable economy outweigh the costs.
In delivering the July monetary policy statement, RBA governor Philip Lowe said that inflation had continued to track at a level beyond the RBA's 2-3% annual target over the medium term. He attributed this to global inflationary pressures, including disruptions to supply chains due to the COVID pandemic, the war in Ukraine, and strong demand, which is putting pressure on productive capacity. Lowe noted that the central bank would continue to monitor these developments closely and make any necessary policy adjustments to achieve its inflation target.
Ian Verrender, business editor for ABC, recently commented on the Reserve Bank of Australia's (RBA) decision to raise rates. He noted that while the RBA's primary motivation is to control inflation, the rate rise will have a more significant impact on younger and first home buyers. These groups are more likely to have variable interest rate mortgages, meaning that their monthly payments will increase. This could put additional strain on household budgets and make it difficult for young families to get ahead financially. In addition, the rate rise may dampen demand in the property market and make it harder for young buyers to get into the market. As a result, Verrender argues that the RBA's decision will have a disproportionate impact on young Australians.