Finance Finance News Reserve Bank hikes cash rate to 0.85 per cent

Reserve Bank hikes cash rate to 0.85 per cent

reserve bank
The Reserve Bank has hiked interest rates for the second time in as many months.
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The Reserve Bank has lifted the official cash rate from 0.35 per cent to 0.85 per cent in a bid to curb rising inflation.

In a statement released after the bank’s monthly board meeting on Tuesday, Reserve Bank governor Philip Lowe said the RBA had chosen to lift rates by 50 basis points to 0.85 per cent – a bigger rise than had been expected.

“Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected,” Dr Lowe said.

“Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago.

“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today’s increase in interest rates will assist with the return of inflation to target over time.”

Tuesday’s hike follows a quarter-percentage point increase in May and – if passed on in full – will add $133 to the monthly repayments of home owners paying the average variable interest rate on a $500,000 mortgage.

It is only the second time the RBA has lifted interest rates since November 2010.

The central bank was widely expected to hike rates after the latest consumer price index showed annual inflation in the March quarter had risen to its highest level since 2001. But Tuesday’s decision to raise rates by 0.50 percentage points was higher than expected, with most analysts predicting a lift of 0.25-0.40 basis points.

Unemployment has also fallen close to record lows, weakening the case for maintaining such low interest rates.

Hours before the RBA’s rate hike decision, Treasurer Jim Chalmers warned Australian households to brace for an “expensive winter” as energy and grocery prices rise in tandem with interest rates.

“We are in the midst of a full-blown cost of living crisis and electricity prices and gas prices are unfortunately part of that pain,” he told Channel 7.

“Our job, as the government, is to make sure that after some of this near-term cost of living relief runs out, that it is replaced by responsible, long-term, sustainable cost of living relief.”

It comes after Coles chief executive Steven Cain suggested last week that grocery prices had even further to rise, as the supermarket had experienced a fivefold increase in the number of suppliers requesting price hikes to cover surging costs.

“And they’re not small amounts,” Mr Cain said of the price hike requests.

“It’s not 2 per cent or 3 per cent being asked for either, so there is, you know, the usual ‘pig in the python’ trying to work its way through the system. Whether things plateau or whether they come down slowly remains to be seen.”

The extent to which the supplier cost hikes will flow through to shoppers is unclear, but grocery prices have already risen substantially in 2022.

Data from investment bank UBS shows Woolworths lifted food prices by 4.3 per cent in the March quarter, while Coles lifted them by 3.2 per cent.