RBA governor Philip Lowe has announced the central bank will increase the cash rate amid rising inflation.

Following its monthly monetary policy meeting today (5 July), the Reserve Bank of Australia (RBA) has announced that it will increase the cash rate by 50 basis points (bps).

The move is the second 50-basis-point hike in a row and follows the 25-bp hike in May, taking the official cash rate to 1.35 per cent.

The RBA’s deliberations today firmly move the cash rate away from its historic low of 0.1 per cent, where it was held for several years during the pandemic.

The decision comes as inflation is expected to hit 7 per cent at a time when unemployment rates are low and household budgets are under pressure.

PropTrack’s senior economist Eleanor Creagh said the move reiterated the RBA boards’ determination to overcome the challenge of high inflation and do “what is necessary” to rein in inflation pressures.

“A consecutive 50-bp hike at today’s meeting has reaffirmed this determination to get ahead of the curve,” Ms Creagh said.

However, the effect of a rising interest rate environment will be deteriorating housing affordability, she said.

“Housing affordability will continue to decline as repayments become more expensive with rising interest rates,” she said.

The effects of deteriorating house prices has been seen over May and June, with PropTrack reporting a fall of more than 35-bps for the two consecutive months.

“It is important to put price falls in context. We have seen extraordinary growth in housing prices over the last two years, with home prices up 34 per cent on pre-pandemic levels. Further price falls would still leave prices above pre-pandemic levels,” Ms Creagh said.

“Mortgage rates have moved higher, and many buyers can no longer borrow the same amount as this time last year.

As interest rates are expected to continue to rise, she said prospective buyers not only face higher borrowing costs but have “a lot more uncertainty” around future borrowing costs.

“This is being reflected in the housing market – buyer demand is moderating, auction volumes and clearance rates have fallen and sales volumes have also slipped, along with falling prices,” Ms Creagh said.

“Whilst high household debt and weak sentiment is a risk, these factors are offset by the tight labour market, promoting a degree of confidence and job security and hopefully, in turn, stronger wages growth.

Further, governor Lowe stated last month that increases in interest rates in May and June had not impacted “most people’s” mortgage payments and that households were sitting on large savings buffers – up to two years ahead of their mortgage repayments providing some reassurance. 

However, as Australian homeowners are heavily impacted by the ‘wealth effect’, chief economist at CreditorWatch Anneke Thompson said for those with investment portfolios, this will have a “large negative impact” on consumer sentiment.

“Nobody likes falling asset values, but, perversely, it presents an opportunity for the Australian economy, Ms Thompson said.

“The hope being that the combined impact of the wealth effect and reduced disposable income will bring inflation down faster than in countries where household debt isn’t as high.

“Of continuing concern is supply side inflation. Neither the RBA or the government has much control over this type of inflation, and it will take some months to determine if reducing demand has enough of an impact to bring prices under control.”

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