The Reserve Bank of Australia has hiked interest rates by 25 basis points, becoming the first major central bank to go from rate cuts to rate hikes following the post-Covid inflation spike.
In a unanimous decision on Tuesday, the RBA’s monetary policy board lifted the cash rate to 3.85 per cent.
The move was tipped by most economists and expected by financial markets, which attributed a three-quarter chance of a rate rise ahead of the decision, after inflation surged back above the RBA’s 2-3 per cent target band.
Labour force data and consumer spending was also above RBA forecasts, heightening fears that the economy was running above capacity and contributing to inflationary pressures.
But the decision was a difficult one for the Reserve Bank nonetheless, having only last cut interest rates in August.
After bucking the trend of peer economies by intentionally keeping rates lower for longer to prevent a spike in unemployment, the RBA becomes the first major central bank to return to interest rate rises since the pandemic.
Some economists had predicted the RBA would prefer to wait for further data, given recent monthly inflation data had been softening and strength in the Australian dollar would take some heat out of the economy.
Domain chief economist Nicola Powell said while it would reduce homebuyers’ borrowing power, the hike would take some momentum out of the housing market.
A borrower with a $600,000 mortgage would see their monthly repayments increase by about $90, assuming lenders pass on the increase in full.
Attention now turns to what tone governor Michele Bullock strikes in her post-meeting press conference, with economists less sure about whether the RBA will follow the hike with further rises or make it a one-and-done affair.
In updated economic forecasts, RBA staff revised up their inflation assumptions, with core inflation expected to come in at 3.2 per cent by the end of 2026, up from their November prediction of 2.7 per cent.
