RBA increases May interest rates to 3.85%, marking an 11-year high

The Reserve Bank of Australia (RBA) has announced an interest rate rise of 25 basis points following their board meeting today. The cash rate is now at 3.85%, marking an 11-year high.

Following the announcement, RBA Governor Philip Lowe stated, “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.

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.”

It has been a year since May 2022, when the RBA has continuously hiked the cash rate by 375 basis points, now reaching 3.85%.

This cash rate rise is attributed to many economic factors, including housing affordability, retail spending, wage growth and employment, and household savings.

As a result of these rate increases, the average borrower with a 25-year, $500,000 loan at the start of the hikes in May 2022 could soon be paying approximately $1,058 more monthly on their mortgage.

Dr Lowe recognises the effects of these interest rate hikes on the housing market, saying in his statement, “A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending.”

After all is said and done, Dr Lowe stated that “The Board’s priority remains to return inflation to target.

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. Today’s further adjustment in interest rates will help in this regard.”

Dr Lowe also stated that the Board seeks to return inflation to the targeted 2-3% range.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.

“The Board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

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