The Reserve Bank has unveiled its seventh hike in interest rates since May as it battles rising inflation, lifting its target by 0.25 percentage points.

The move will add another $78 to typical monthly mortgage bills on top of the $731 that’s been piled on already as the cash rate has risen from a record low 0.1 per cent to 2.85 per cent – the highest in nearly a decade.

The RBA also updated its forecasts for the economy on Tuesday, saying that inflation will now peak higher and take longer to fall than previously.

Meanwhile, unemployment is set to rise higher and economic growth will be weaker over the next few years than under previous RBA forecasts.

RBA governor Philip Lowe said on Tuesday that further rate hikes will be needed to push inflation down, after figures published last week showed prices rose at the fastest pace in 32-years over the September quarter.

The central bank is tipped to pass on another 0.25 percentage point rate hike in December, just as the inflation rate is expected to begin peaking.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” Dr Lowe said in a statement.

The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Interest rates slam homeowners

Tuesday’s move sets a new record for the most consecutive rate hikes in a row by the Reserve Bank and will further squeeze homeowners who are paying down variable rate mortgages ahead of Christmas holidays.

Someone paying a typical 30-year, $500,000 mortgage will pay $889 a month more than in May if rates rise again in December, Canstar said.

Those with larger $1 million mortgages will pay $1779 a month more.

Markets expect the RBA will continue raising interest rates in 2023 too, albeit after a brief reprieve over the New Years period, with investors pricing the central bank’s target at 3.81 per cent by May next year.

The RBA has already slowed the pace of rate hikes as the cash rate target has normalised, with Tuesday’s move being the second 0.25 percentage point rise in a row following five 0.50 percentage point rises.

Graham Cooke, head of consumer research at Finder, said Tuesday’s rate hike was a “bitter pill to swallow” for homeowners.

“Finder research is showing a significant increase in the number of households indicating housing, groceries and petrol as causes of financial stress,” he said.

“According to the experts, the factors causing these price increases are likely to hang around for many months, meaning no relief on the horizon for households.”

CoreLogic research director Tim Lawless said Tuesday’s hike brings the quantum of cash rate rises since May close to the buffer rates the banks use to calculate whether a household can afford to take on a home loan.

“The average variable mortgage rate for a new owner occupier loan is set to reach approximately 4.96 per cent, up from the April low of 2.41 per cent,” he said.

“The cumulative 2.75 percentage point rise through the tightening cycle since May takes home loan rates above the 2.5 per cent  serviceability buffer that was used before October 2021 and close to the current 3 percentage point serviceability buffer.”

Grim new forecasts

The rate hikes are all part of an effort to bring down inflation, which reached 7.3 per cent in annual terms in the September quarter and is now tipped to peak at 8 per cent over the December quarter, before easing in early 2023.

The RBA is trying to squeeze household budgets so they demand fewer goods and services, which makes it harder for businesses to lift prices.

And there are signs that’s starting to happen, with retail sales data for September published on Monday showing a slowdown in discretionary spending, despite savings rates remaining relatively high post-COVID.

But on Tuesday the RBA said inflation will peak higher than it previously thought and will remain above its 2 – 3 per cent target range for longer.

New forecasts predict inflation will reach 8 per cent over the December quarter (up from 7.75 per cent), and will only fall to 4.75 per cent in 2023 (compared to 4.3 per cent forecast in August).

The unemployment rate is also now tipped to rise above 4 per cent (currently 3.5 per cent) in 2024, while economic growth will be weaker too, with the latest GDP forecasts trimmed 0.2 percentage points in 2023 and by 0.8 percentage points in 2024.

BIS Oxford senior economist Sean Langcake said the new predictions come after lat week’s inflation data which was “major news” to digest.

“The RBA’s near term inflation outlook has risen further, in part due to the impact of recent floods on food prices,” Mr Langcake said.

“While inflation pressures are expected to abate next year with the resolution of supply-side disruptions, the RBA look set to take further action to rein in demand.”

Dr Lowe is due to deliver a speech on Tuesday night in Hobart.