Australian homeowners have come under increased pressure after the Reserve Bank of Australia (RBA) increased the official cash rate by 50 basis points. Analysts widely anticipated the move, with homeowners also being warned there are further rate increases to come. This is Australia’s third cash rate increase in three months, increasing it to 1.35%.
Households across the country are already trying to deal with price pressures, including the soaring cost of petrol and food. Many are struggling despite a short-term reduction on fuel excise. As the central bank tries to tackle rocketing inflation, the financial strain on Australian households will continue growing.
Outlook for inflation to determine future increases
Following the announcement of the rise on Tuesday afternoon, RBA Governor Philip Lowe indicated there could be further rises based on inflationary pressures and other factors.
In a statement, Mr 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. The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
Jim Chalmers, the Treasurer, also spoke out before the announcement of the rate increase. He said that it was vital to be clear that there would be challenging conditions for households to contend with for the rest of the year. He warned that this latest cash rate increase would not be the last one to take place this year.
Many market analysts expect the cash rate to rise to 2-3% as the central bank tries to control inflation. This means soaring repayments for households already overstretched due to rising inflation.
Chalmers said he realised that the interest rate increases meant “a bigger proportion of household budgets, which are already stretched by the price of petrol and groceries and electricity and other essentials, [would] be eaten up by mortgage repayments.”
He also said that the decision to increase the cash rate had been difficult but necessary because of “high and rising inflation.”
Inflation could rise to 7% by the end of the year
Industry experts believe that inflation could rise to 7% by the end of the year, a trend fuelled by rising energy prices and global supply chain issues.
According to Lowe, inflation could drop back to 2-3% next year after peaking later this year. He added that increasing interest rates could help ensure a “sustainable balance between the demand for and the supply of goods and services.”
After speaking to retail banks, Chalmers said that many people found themselves in a position to pay down their mortgages during the pandemic. However, he also noted that many homeowners are ‘right on the margins’.
Chalmers stated that the rate rises were tough to handle for those on the margins. However, he added that the increases would also take their toll on those with little financial leeway, as they would still have to find extra money from their household budgets.