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Interest rates rise to decade high as RBA delivers Christmas pain

The Reserve Bank has raised interest rates for an eighth straight month, lifting its target by 0.25 percentage points as it battles sky high inflation.

The Christmas hike takes the overnight cash rate to 3.10 per cent, the highest level since 2012, adding another $75 to typical mortgage bills.

A homeowner paying down a 25-year $500,000 mortgage will now have seen their monthly bill rise $834 since the RBA began increasing interest rates from record lows in May, according to the latest RateCity figures.

RBA governor Philip Lowe said on Tuesday higher rates were needed to push inflation down from three decade highs, signalling further hikes will be necessary in 2023, even as the pace of price rises starts to ease.

“There has been a substantial cumulative increase in interest rates since May. This has been necessary to ensure that the current period of high inflation is only temporary,” Dr Lowe said in a statement on Tuesday.

“High inflation damages our economy and makes life more difficult for people. The Board’s priority is to re-establish low inflation and return inflation to the 2–3 per cent range over time.”

The RBA was widely expected to push through another 0.25 percentage point rate hike on Tuesday after higher than expected inflation over the September quarter dashed hope of a Christmas reprieve for Australians.

Headline inflation rose at 7.3 per cent in annual terms, while underlying inflation – which is watched closely by the RBA board – was 6.1 per cent.

Both were far higher than the central bank’s 2 – 3 per cent target band, which on the latest RBA forecasts will not be achieved in 2023 or 2024.

The RBA is attempting to cool quell inflation by squeezing households, which should reduce their demand for goods and services and make it harder for firms to pass on further price increases without losing sales.

Dr Lowe said on Tuesday that the pace of price increases is starting to abate, but that it would be some time before inflation returned to target.

“The Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments,” he said.

“Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain.”

The December rate hike is more bad news for homeowners, particularly those who purchased property during COVID when rates were nailed to the floor at 0.1 per cent.

Under prudential regulations banks were required to test the ability of these borrowers to afford their repayments if rates rose up to 3 per cent.

They have now risen by that much since May, though major banks have said most families are managing to keep up with rising mortgage bills.

Tuesday’s RBA board meeting will be the last of 2022, the bank’s board will return to make its next interest rate decision on February 7, 2023.

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