RBA raises rates once more as inflation stays stubbornly high.

Due to Australia's persistent inflation problems, the RBA has dealt a harsh blow to borrowers all over the nation with its most recent rate increase.

The Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points on Tuesday afternoon, bringing it to 4.10 percent. From the historically low pandemic low of 0.1% that Australians experienced for more than two years, that represents a significant increase.

The bank has increased rates 12 times since May of last year, making this the highest cash rate in the last 11 years. Mortgage owners have been hit with a 400-basis point hike in the space of a year in what has been hailed as the fastest tightening cycle on record, as inflation stays stubbornly high.

April 2023 has been the only exception, when the RBA briefly paused rates, giving mortgage holders a much-needed reprieve. However, new data from the Bureau of Statistics found Australia’s inflation is still stubbornly high, sitting 6.8 per cent in the past 12 months ending April.

In a worrying trend, the RBA’s inflation target is to keep consumer price inflation between two to three per cent, which is clearly nowhere near current levels. The peak of Australian inflation has passed, but the current rate of 7% is still too high, and it will be some time before rates return to the desired range.

This additional rise in interest rates is intended to boost confidence that inflation will reach its target level within a reasonable time frame. High inflation makes life difficult for everyone and hurts the economy. According to the financial comparison website Finder, the rate increase will cost Australians an extra $1200 per month. With an average loan size of $577,000, Australians will pay more than $15,000 more annually for their mortgage than they did in April of the previous year.

Some economists applauded the decision amid warnings that Australia’s inflation rate is much higher than it should be. Former senior RBA employee and current chief economist Peter Tulip claimed that a rate increase for June was not only "inevitable," but also "desirable." If you don't tighten enough, inflation expectations run the risk of becoming unanchored. resulting in a significant rise in unemployment later. Eleanor Creagh, senior economist at PropTrack, agreed that there were early indications of a strengthening housing market.

“After five consecutive months of national home price growth, stronger market conditions are more pervasive, and price rises are more widespread.”

"The Reserve Bank's decision to raise the cash rate in May did not impede the current home price recovery; on the contrary," she claimed.

"Stronger market conditions and price increases are more pervasive after five consecutive months of national home price growth.”

Home prices are rising because of strong demand compared to stock market activity, which is offsetting the downward pressure from ongoing interest rate increases.

“After five consecutive months of national home price growth, stronger market conditions are more pervasive, and price rises are more widespread.

“Strong demand relative to stock on market is seeing home prices lift, and offsetting the downward pressure from continued interest rate rises.”

Many of Australia's largest banks and influential economists believed the peak cash rate had already been reached, so the decision may have surprised some.

Only 44% of the panellists anticipated the rate increase. Experts had hoped that June would also come to a halt, giving the country a much-needed reprieve, but their expectations were dashed.

Australians had to endure a peak interest rate that was predicted incorrectly by the CBA and Westpac. Both banks set the terminal rate at 3.85 percent because they didn't expect another increase on Tuesday.

The direst prediction came from ANZ, which said the terminal rate would be 4.35 percent and wouldn't be reached until August.

We now anticipate the likelihood of multiple rate hikes before the year's end. The timing of these hikes is the only thing we still don't know.