Key Points
- The Reserve Bank of Australia says inflation will peak higher than first predicted, rising to around 8 per cent.
- The last time Australians faced an inflation rate this high was 35 years ago.
The Reserve Bank of Australia (RBA) expects inflation to peak at a level higher than first predicted as it lifted the official cash rate a quarter of a percentage point, paving the way for banks to increase their interest rates.
In July, the central bank's governor Philip Lowe predicted —a broad increase in the price of goods and services — would rise to 7 per cent in December before it began to fall. But in a statement on Tuesday, the RBA said it now expects inflation to peak at around 8 per cent later this year.
It came as the RBA increased the official cash rate to nine-and-a-half-year high of 2.85 per cent, up from 2.6 per cent. It is the seventh consecutive rise it has made since May, when the cash rate .
Tuesday's 0.25 percentage point increase was in line with what the majority of Australia's big four banks has predicted. Only Westpac had forecast a cash rate increase of 0.5 percentage points.
The RBA's latest cash rate increase paves the way for lenders to increase interest rates. Source: AAP
When will inflation begin to fall?
On Tuesday evening at an RBA board dinner, the central bank's governor Philip Lowe described inflation as a "scourge" that "worsens inequality... and undermines our living standards."
Dr Lowe revealed the board had discussed the pain rate rises inflict on families as well as the damage inflation does to people and the economy.
"I understand that the higher interest rates that are needed to bring inflation under control are unwelcome by many people," he said.
He said Australia could risk a severe recession unless the RBA continues to act "strongly" to beat down inflation by hiking interest rates.
If the central bank's peak inflation forecast of 8 per cent is realised, it would be the highest rate Australians have seen in 35 years,
In a statement following Tuesdays' rate decision, Dr Lowe said inflation is expected to drop to 4.75 per cent by next year and continue falling to just over 3 per cent in 2024.
He said that there will be slower growth in demand for goods, some commodity prices will drop, and ongoing problems global supply chain problems that stemmed from the COVID-19 pandemic will begin to ease.
Raising the cash rate has been a "necessary" decision to ensure the supply and demand in Australia is managed appropriately to reach the RBA's inflation target of 2-3 per cent, Dr Lowe said.
"The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that," he said.
How much will mortgage repayments increase after the latest rate rise?
A 0.25 percentage point lift will push monthly repayments up by $74 for a mortgage holder $500,000 in debt with 25 years remaining on the loan, RateCity analysis shows.
NAB has already passed the rate hike in full to home loan customers, lifting monthly repayments for its variable-rate mortgage holders starting from 11 November.
Compared to pre-hikes in May, the same mortgage holder is now forking out an extra $760 per month in repayments. The RBA also foreshadowed more rate hikes to come.
CreditorWatch chief economist Anneke Thompson said the latest rate rise will lock in a slowdown in consumer spending during the usually busy Christmas period.
Ms Thompson said there were several signs of economic trouble in 2023.
"The RBA board will likely have carefully considered labour force data, which showed that the unemployment rate has stagnated at 3.5 per cent, employment growth has slowed dramatically, and job vacancies have stopped rising," she said.
Treasurer Jim Chalmers described the latest rise as a "difficult day for Australians", and said inflation was the economy's "biggest challenge".
With AAP.
