Home loan holders copping interest rate carnage with June RBA hike

In a call almost no leading economists predicted, the Reserve Bank of Australia doubled down its tightening bias today with another rate rise. The decision adds 25 basis points to official interest rates , pushing the cash rate to a decade-high of 4.10%.

In his post-meeting statement, RBA governor Philip Lowe emphasised that despite a lack of meaningful data, he is determined to tighten the hold on inflation .

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” explained Lowe.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”

Indeed, while many economists at Australia’s major banks have estimated the cash rate would eclipse 4%, they didn’t expect the decision to come until July or August. The RBA has repeatedly demonstrated that if it can lean hawkish with monetary policy , it will.

Today’s decision will also remind home loan borrowers that now is the time to cut back and economise – not spend.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending,” says Lowe.

“Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances.”

RBA meeting minutes released later this month will likely go out of their way to justify today’s decision. Westpac made this criticism after last month’s surprise rate hike: everything seems obvious in hindsight, after all. Interest rate decisions that are won only by a slim majority must seem like inevitable conclusions. In reality, the RBA treads an incredibly narrow path.

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The post-meeting statement reiterates this narrow path the RBA must navigate to achieve a ‘soft landing’, i.e. bring inflation down without plunging Australia into a recession . Little is certain, and the bank must make decisions reactive to the economic climate.

But given the RBA had previously promised rates wouldn’t rise until 2024, it behoves us to remember that neither Philip Lowe nor the rest of the RBA Board can see the future. They fly just as blindly as everyone else, albeit with wealth and economics degrees in their back pockets .

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