Reserve Bank cash rate rise to 'sting'

It's not a shock, but it will sting.

That's the verdict from Treasurer Jim Chalmers on the Reserve Bank board's decision to hike the cash rate by 50 basis points to 1.85 per cent - its highest level in more than six years.

For someone with a $500,000 mortgage at the start of May, with 25 years remaining, the total increase across the four hikes would be $472 a month, according to RateCity.

RBA governor Philip Lowe said in a statement after the board meeting the rate rises in recent months were required "to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy".

The RBA is seeking to use rate rises to get the inflation rate, currently at 6.1 per cent, back to its target band of two to three per cent.

The bank's central forecast is for CPI inflation to be around 7.75 per cent over 2022, a little above four per cent over 2023, and around three per cent over 2024, he said.

"The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path," Dr Lowe said.

"The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market."

Dr Chalmers told parliament on Tuesday it was "another difficult day" for mortgage holders.

"It's not a shock to anybody, but it will still sting," he said.

"Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures like higher grocery prices and higher power prices."

But he said he was "confident that we will emerge on the other side of this stronger than before".

Dr Lowe said Australians were finding jobs and obtaining more hours of work.

"Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic," he said.

"The board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy."

Capital Economics' Marcel Thieliant is forecasting a cash rate of 3.6 per cent by early-2023, but there could be better news later next year.

"With house prices now falling at the fastest pace in four decades, we expect GDP growth to slow more sharply next year than the bank anticipates," he said.

"The upshot is that we expect the RBA to start cutting interest rates again towards the end of next year."

Opposition Leader Peter Dutton told coalition colleagues the government was "enjoying a honeymoon and living high on the hog" while many families were doing it tough.

"It's clear to all of us that Labor doesn't know which levers to pull on the economy and they are going to make a bad situation worse," he said.

Meanwhile, the ANZ-Roy Morgan Australian consumer confidence report released on Tuesday found consumer confidence rose by 2.1 per cent last week, despite news that headline inflation exceeded six per cent in the year to June.

ANZ's David Plank said the sharp fall in petrol prices over the past three weeks may have been more important to consumers.

"Despite the gain in the past three weeks, sentiment remains at a very low level and vulnerable to more tightening from the RBA," Mr Plank said.

In other economic news, the value of new loan commitments for housing fell 4.4 per cent in June, but remained at a historically elevated level of $31 billion, according to the Australian Bureau of Statistics.

The value of new owner-occupier loan commitments fell 3.3 per cent in June, while new investor loan commitments fell 6.3 per cent.

The total number of dwellings approved fell 0.7 per cent in June, following a 11.2 per cent rise in May.

Austrlaian Associated PressBack to Breaking News

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