RBA interest rates: Reserve Bank lifts official cash rate to 0.85 per cent with Westpac first to pass on rise

Danielle Le Messurier & Peter Law The West Australian
Westpac CEO Peter King.
Camera IconWestpac CEO Peter King. Credit: METHODE

The Reserve Bank of Australia’s surprise move to hike the official cash rate from 0.35 per cent to 0.85 per cent — the biggest one-month increase in more than two decades — will further squeeze households already battling a cost of living crisis.

But the second rate rise in two months is just the start of the pain for homeowners, with the RBA on Tuesday warning of further hikes to curb rampant inflation which is playing out in rising food, fuel and energy prices.

Westpac was the first of the big four banks to announce it was increasing its home loan interest rates following the RBA cash rate announcement, saying it would lift variable interest rates by 0.50 per cent from June 21.

Federal Treasurer Jim Chalmers said he felt for Australian consumers who were facing “the worst combination of price pressures in the economy”. However, he warned the inflation challenge would get harder before it gets easier.

“Australians already know that because they are paying ever higher prices for their groceries and energy, and now to service their mortgage as well,” Mr Chalmers said after the RBA announced its decision.

Shadow treasurer Angus Taylor agreed the rate rise would “hurt many Australians who are already feeling the pain of rising prices” and called on Labor to outline its plan to ease cost of living pressures.

CoreLogic research director Tim Lawless said that with the cash rate up, it was likely banks would raise variable mortgage rates by the same or a similar amount over the coming week, taking the average variable interest rate for a new owner occupier loan to around 3.16 per cent.

“Together with the 25 basis point increase handed down last month, the cumulative 75 basis point lift in mortgage rates will add approximately $200 per month in additional repayments on a $500,000 mortgage compared with mortgage rates in April,” he said.

Jim Chalmers and Josh Frydenberg during a debate at the Canberra Press Club.
Camera IconFederal Treasurer Jim Chalmers. Credit: Unknown/ABC NEWS

The RBA’s 50 basis point move at its June meeting on Tuesday represents the first time since February 2000 that it has lifted its cash rate target by more than 25bp in one fell swoop.

It is also only the second hike since 2010, after the central bank increased the cash rate at its May meeting — three weeks out from the Federal election — from a historic low of 0.1 per cent to 0.35 per cent.

The larger than expected move blindsided economists and banks, who had largely been predicting a 25 or 40bp increase.

RBA Governor Dr Philip Lowe said in a statement that “inflation in Australia has increased significantly” and that “the Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”.

“Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago,” Dr Lowe said.

“As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.”

Inflation surged to 5.1 per cent in the year to the end of the March quarter on higher house and petrol prices, with Perth recording the highest inflation of all the capital cities (up 7.6 per cent for the 12 months).

Dr Chalmers said that while Australians had been expecting higher interest rates the rise would still be “very difficult news” for those grappling with the cost of living crisis.

In addition to the pressure it will put on family budgets, he said it would also make it more difficult for the Commonwealth to service the $1 trillion of debt it inherited from the Morrison government which was “already costing around $20 billion a year”.

“We have an incredibly difficult challenge of combinations: high and rising inflation, rising interest rates, falling real wages at a time when our ability to respond to these challenges is constrained by the fact that the Budget is absolutely heaving with Liberal debt,” Dr Chalmers said.

Dr Chalmers said Labor would do all it could to alleviate pressure on Australians, flagging the October Budget would include a cost of living package that would implement the party’s plans for cheaper childcare and cheaper medicines. He said it would also address energy prices and wages.

While of little comfort to households, EY chief economist Cherelle Murphy said it was worth noting that current levels of interest rates — even at the increased level of 0.85 per cent — remain extraordinarily low.

“They should expect more hikes in their mortgage rates, and perhaps even additional basis points from the banks who may try to claw back some margin as the cycle progresses,” she said.

The rate hike came as new data from an online financial service revealed West Australians without a financial safety job and no government support could only survive 21 days if they suddenly lost their job.

Otivo said more than 37,000 Australian households had no safety set, such as savings, credit cards or the ability to draw down on their mortgage.

The data, collated in partnership with Digital Financial Analytics (DFA), was based on a survey of more than 52,000 households across the country.

It showed that even with government support, WA households would typically only survive financially for 20 weeks if they saw their income cut-off.

The most at-risk suburbs included Leederville (10 weeks), Merriwa (10 weeks), Osborne Park (12 weeks) and Port Kennedy (12 weeks), according to the research.

Further data provided by DFA showed the post codes with the highest rates of mortgage stress were 6065 (Tapping), 6030 (Merriwa), 6163 (Samson), 6164 (Success) and 6069 (Innaloo).

S&P Global said WA remained the State with the highest mortgage arrears rates in the country, but the situation had improved during the pandemic.

As of the end of January, the credit ratings agency’s residential mortgage- backed securities index said 1.63 per cent of WA home loans were more than 30 days in arrears.

Get the latest news from thewest.com.au in your inbox.

Sign up for our emails