Final hammer? Hawkish RBA stomps inflation with 0.25% May rate hike

After a month of uncertainty, the Reserve Bank of Australia has pumped the brakes once more with a 0.25% hike to the official cash rate , lifting it to a sky-high 3.85% p.a.

Heated debate anticipated today’s decision, with many analysts predicting a “coin flip” between a hike and no hike. The most dovish argued that declines in retail spending and inflation were enough to justify a pause, while the most hawkish pointed to signs of worldwide economic uncertainty and mortgage stress at home.

However, with inflation still well outside the RBA’s target, the central bank has given the economy another hit to ensure the slowdown sticks. Otherwise, they could risk undoing all the progress the previous hikes have made.

In a post-meeting statement to the press, RBA governor Philip Lowe explained, "The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook."

"While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range."

But with symptoms of contraction already cooling the overheated economy, today’s announcement may have brought us closer to the cash rate peak . Lowe softened his language considerably around how much higher rates will have to go to effectively curb inflation.

"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve."

With interest rates now stratospheric, many homeowners will wonder how much further the RBA must go in its war against inflation. Indeed, in a survey conducted earlier this year by Mozo, only 39% of respondents can afford rate rises from this point forward.

“People are already feeling the cost of living pressures acutely,” explains Mozo banking expert Peter Marshall. “But at the same time, inflation hasn’t come down far enough. Spending hasn’t really slowed as much as the Reserve Bank would like.”

Today’s decision, in the central bank’s eyes, may prove painful but ultimately necessary to avoid the caustic effects of long-term inflation.

Many of the Big Four Banks, however, reckon 3.85% might be as high as interest rates will go, though there is always potential for a 4.10% terminus in June. Either way, we now sit firmly in territory strong enough to contract the over-inflating market.

“I think we’re either at – or very close to – the peak of the cash rate,” concludes Marshall.

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