As expected, the Reserve Bank of Australia (RBA) has lifted the official interest rate by 50 basis points to 85 basis points – the biggest one-month lift in rates in 22 years.
It was the second rate rise in as many months.
The official interest rate is now 0.85 per cent, an increase of half a percentage point on the previous rate of 0.35 per cent.
The move had been predicted by many economists and represents the first back-to-back monthly rises in 12 years.
Economists predict that the RBA will continue to lift rates and that they will be 1.50 to 1.75 per cent by the end of 2022.
Read: Why cost-of-living pressures bite pensioners the hardest
RBA governor Philip Lowe says the increase was needed to address Australia’s runaway inflation levels.
“Inflation in Australia has increased significantly,” he says.
“While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation.
“But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.”
Read: Gas prices described as ‘apocalyptic’ as winter bites
Self-funded retirees who own their homes are set to be the big winners, as those with big amounts in savings will receive more in bank interest.
It’s bad news for people still paying off a mortgage.
For Australians with a $500,000 mortgage, the rate rise will lift monthly repayments by about $133. For those with a $1 million loan, the 50-basis point increase will lift monthly repayments by $265.
Read: Simple tips to maximise your eligibility for the Age Pension
The increase is expected to have an immediate negative effect on house prices – fantastic news for first homebuyers, but not if you’re looking to sell your house right now.
Dr Lowe says he is aware of the cost-of-living pressures facing Australians, but believes the rise is necessary based on the current economic climate and adds that the economy is “resilient” enough to absorb the rate increase.
“The Australian economy is resilient, growing by 0.8 per cent in the March quarter and 3.3 per cent over the year,” he says.
“Today’s increase in interest rates by the board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
“The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.”
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