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Australian mortgage borrowers are bracing for the household budget to get even tighter as another interest rate hike looms this afternoon.

Currently, Australia’s official cash rate target is 0.85 per cent, having increased by 50 basis points in June.

It’s widely expected that the Reserve Bank of Australia (RBA) will lift rates by a similar amount at 2:30pm in a bid to tackle soaring levels of inflation.

If the RBA increases the cash rate by another 50 basis basis points, the average owner-occupier with $500,000 debt and 25 years remaining will see their repayments rise by $137.

Treasurer Jim Chalmers has warned that inflation will “get worse before it gets better” and rate hikes will likely become a “reality” over the coming months.

“That’s the brutal reality, unfortunately,” he said.

“A lot of people that I talk to around Australia are facing that same diabolical set of circumstances, where prices for everything are going up, people’s wages aren’t keeping up, it’s harder and harder for small businesses to operate.

“He said Australia was in a ‘tough period’ with flood disasters combining with financial pressures.

“The government is doing what it can but really the only solution to this in the medium term is to try and build a budget and an economy which is as resilient as the Australian people themselves, and that’s what we’re working on.”

Shadow Treasurer Jim Chalmers.
Treasurer Jim Chalmers has warned of a “brutal” economic reality over the coming months. (Getty)

According to RateCity.com.au, the same borrower would have already endured a $333-a-month increase from where interest rates were prior to May 2022.

“Australians are potentially staring down the barrel of the steepest RBA hikes since 1994,” the site’s research director Sally Tindall said.

“Variable rate borrowers should prepare for another 0.50 percentage point hike this month and potentially another double hike in August.

“This would be a bold move by the Reserve Bank but not at odds with action other central banks are taking to rein in inflation.

“Governor Lowe might have poured cold water on suggestions the cash rate could get to 4 per cent by Christmas, but the RBA is still likely to rip the band-aid off quickly.”

So how high could interest rates go?

According to Westpac’s latest forecast, the cash rate could increase to 2.35 per cent by the end of 2022 and hit 2.60 per cent by early next year.

If this forecast is realised, the same borrower used in the above examples could see their monthly repayments rise by $685 in less than 12 months.

Canstar finance expert Steve Mickenbecker said increases to mortgage repayments were just one factor squeezing every last dollar out of a lot of household budgets.

House prices have already begun retreating following the first interest rate rise in May. (Flavio Brancaleone)

“Two in every five Australians expect to face a bill or loan payment in the next six months that they won’t be able to afford,” Mickenbecker said.

“What’s most concerning is almost half of those struggling to meet their bills will partially pay their bills or borrow from family and friends, showing there is a high level of desperation in peoples’ planning when it comes to meeting the cost of day-to-day living.

“Hopefully the one in five who plan to run up their credit card debt will be able to get on top of it when wage rises finally start to catch up, as the Reserve Bank expects.

“If the outlook for wage rises is too far off, the increase in living expenses and loan repayments will hit a crisis level, in particular for recent borrowers.”

Australia’s top 10 richest people of 2022 revealed

The RBA will hand down its July Monetary Policy Decision at 2.30pm this afternoon. You can catch the decision as it breaks live on nine.com.au and 9news.com.au.

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