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The Reserve Bank of Australia has raised interest rates for the first time in 11 years to curb soaring inflation – surprising financial markets with a bigger than expected increase.

Governor Philip Lowe has hinted at ‘further increases in interest rates’ in coming months.

The cash rate on Tuesday rose by 0.25 percentage points, ending the historic era of a record-low 0.1 per cent cash rate and marking the first increase since November 2010.

This was also much bigger than the 0.15 percentage point rise financial markets were expecting, threatening the re-election hopes of Prime Minister Scott Morrison ahead of the May 21 poll.

The official rate now stands at 0.35 per cent – the highest since March 2020 at the start of the pandemic – after inflation in the year to March soared by 5.1 per cent – the fastest pace in 21 years.

‘We are now in this journey out of the pandemic,’ Mr Morrison said on Tuesday after the decision. 

‘Inflation has picked up significantly and more than expected.

‘Of course, a 25 basis point increase in the cash rate, that will be harder and we understand that.’ 

The central bank move is also the first during an election campaign since November 2007, when former Liberal prime minister John Howard lost power after 11 years and his own seat.

But Mr Morrison said many borrowers had fixed their mortgages in preparation and sidestepped a question about whether this had cost him the election.

‘Australians have been preparing for this for some time,’ Mr Morrison said.

The Reserve Bank of Australia has raised interest rates for the first time in 12 years to curb soaring inflation (pictured is an auction at Hurlstone Park in Sydney)

The Reserve Bank of Australia has raised interest rates for the first time in 12 years to curb soaring inflation (pictured is an auction at Hurlstone Park in Sydney)

The Reserve Bank of Australia has raised interest rates for the first time in 12 years to curb soaring inflation (pictured is an auction at Hurlstone Park in Sydney)

How the banks are responding to RBA rise

WESTPAC, ST GEORGE: ‘Reviewing variable rates’

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Dr Lowe acknowledged the increase on Tuesday was ‘earlier than the guidance during the darkest days of the pandemic’ when he promised to keep the cash rate on hold until 2024.

‘We expect a further increase in the inflation rate,’ he said. 

‘We expect further increases in interest rates will be necessary in the months ahead. 

‘If interest rates were to remain unchanged, inflation would be substantially higher.’

Three of Australia’s Big Four banks – ANZ, Westpac and NAB – are expecting the Reserve Bank to take the cash rate to two per cent by 2023 as rates increase seven more times, with more pain possibly coming in June.

Dr Lowe hinted more rate rises were likely in 2022 and 2023 with inflation at the highest level since 2001.

‘Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions,’ he said.

This was also much bigger than the 0.15 percentage point rise financial markets were expecting, threatening the re-election hopes of Prime Minister Scott Morrison (pictured with Treasurer Josh Frydenberg on Tuesday) ahead of the May 21 poll

This was also much bigger than the 0.15 percentage point rise financial markets were expecting, threatening the re-election hopes of Prime Minister Scott Morrison (pictured with Treasurer Josh Frydenberg on Tuesday) ahead of the May 21 poll

This was also much bigger than the 0.15 percentage point rise financial markets were expecting, threatening the re-election hopes of Prime Minister Scott Morrison (pictured with Treasurer Josh Frydenberg on Tuesday) ahead of the May 21 poll

Dr Lowe is also expecting the era of low wages growth that began in mid-2013 to be over this year, after last year declaring weak pay increases could help the RBA to keep rates on hold until 2024 ‘at the earliest’.

‘There is also evidence that wages growth is picking up,’ he said.

With inflation well above the RBA’s two to three per cent target, the word was mentioned 13 times in the May monetary policy meeting statement, issued on Tuesday, with a hint of more rate rises.

‘The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,’ Dr Lowe said.

‘This will require a further lift in interest rates over the period ahead.’

More than 1.5million borrowers will be coping with a variable increase for the first time as monthly repayments on a typical $600,000 mortgage rise by $78.

Asked about this pain, Mr Morrison said:  ‘Of course I have sympathy with that.’ 

Shadow treasurer blamed the government even though the Reserve Bank said Russia’s Ukraine war had pushed up inflation.

‘This is a full blown cost of living crisis on Scott Morrison’s watch. 

‘The PM has an excuse for everything and a plan for nothing,’ he said.

The cash rate has risen by 0.25 per cent basic points, ending the historic era of a record-low 0.1 per cent cash rate and marking the first increase since November 2010. This was also much bigger than the 0.15 percentage point rise financial markets were expecting

The cash rate has risen by 0.25 per cent basic points, ending the historic era of a record-low 0.1 per cent cash rate and marking the first increase since November 2010. This was also much bigger than the 0.15 percentage point rise financial markets were expecting

The cash rate has risen by 0.25 per cent basic points, ending the historic era of a record-low 0.1 per cent cash rate and marking the first increase since November 2010. This was also much bigger than the 0.15 percentage point rise financial markets were expecting

‘If only you could pay your mortgage with Scott Morrison’s excuses.’

Treasurer Josh Frydenberg said he respected the Reserve Bank’s independence and its decision to withdraw emergency-level support for the economy.

‘We don’t have an axe to grind with the Reserve Bank,’ he said.

Dr Lowe said the rate rise wasn’t about politics.

‘The election has no influence at all on today’s decision,’ he said.

‘We don’t take the political situation into account.’ 

Westpac and its subsidiary St George were the first bank to hint at an increase in variable mortgage rates.

‘We are currently reviewing our variable interest rates following the RBA’s cash rate decision,’ it said.

‘We will keep you up to date with any changes here.’

Reserve Bank of Australia Governor Philip Lowe hinted more rate rises were likely in 2022 and 2023 with inflation at the highest level since 2001 (pictured are shoppers at Sydney's Pitt Street Mall)

Reserve Bank of Australia Governor Philip Lowe hinted more rate rises were likely in 2022 and 2023 with inflation at the highest level since 2001 (pictured are shoppers at Sydney's Pitt Street Mall)

Reserve Bank of Australia Governor Philip Lowe hinted more rate rises were likely in 2022 and 2023 with inflation at the highest level since 2001 (pictured are shoppers at Sydney’s Pitt Street Mall)

Last month, the RBA predicted an increase in the cash rate to two per cent – a level unseen since May 2016, would cause a 15 per cent plunge in Australian property prices.

CoreLogic research director Tim Lawless is expecting Sydney and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising.

‘Most of the declines will be concentrated in those two cities because that’s where affordability is most stretched and also where, arguably, they’ll be facing some demographic headwinds just through interstate migration really favouring the smaller states,’ he told Daily Mail Australia.

‘The counter argument to that is we see overseas borders opening up, we’re going to be seeing more migration coming in but that generally tends to flow through to rental demand rather than purchasing demand.’

RBA Governor Philip Lowe acknowledged the increase on Tuesday was 'earlier than the guidance during the darkest days of the pandemic' when he promised to keep the cash rate on hold until 2024

RBA Governor Philip Lowe acknowledged the increase on Tuesday was 'earlier than the guidance during the darkest days of the pandemic' when he promised to keep the cash rate on hold until 2024

RBA Governor Philip Lowe acknowledged the increase on Tuesday was ‘earlier than the guidance during the darkest days of the pandemic’ when he promised to keep the cash rate on hold until 2024

Brisbane, Adelaide, Hobart and Canberra, along with regional areas in coastal New South Wales, southern Queensland and northern Tasmania were likely to see smaller declines of five to 10 per cent.

‘These markets tend to be a little bit more insulated partly because affordability is not quite as stretched,’ Mr Lawless said. 

Those markets are more affordable than Sydney and Melbourne and would continue to benefit from professionals who can work from home moving there. 

A 15 per cent fall in Sydney’s median house price of $1.417million would take values back to $1.204million – where they were in the middle of last year.

CoreLogic research director Tim Lawless is expecting Sydney (pictured) and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising

CoreLogic research director Tim Lawless is expecting Sydney (pictured) and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising

CoreLogic research director Tim Lawless is expecting Sydney (pictured) and Melbourne house prices to dive by 15 per cent in the year ahead, as interest rates keep rising

How much THIS 0.25 percentage point interest rate rise will cost you

$500,000 : Monthly repayments rising by $65 from $1,922 to $1,987

$600,000 : Monthly repayments rising by $78 from $2,306 to $2,384

$700,000 : Monthly repayments rising by $90 from $2,691 to $2,781

$800,000 : Monthly repayments rising by $103 from $3,075 to $3,178

$900,000 : Monthly repayments rising by $116 from $3,459 to $3,575

$1,000,000 : Monthly repayments rising by $130 from $3,843 to $3,973

Data based on variable rate increasing from 2.29 per cent to 2.54 per cent

 

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A drop of the same magnitude in Melbourne would see the mid-point house price drop from $1.001million to $850,787, which would be the lowest level since May 2017.

But with unemployment at just 3.95 per cent, the lowest level since 1974, Mr Lawless said forced sales would be unlikely.

‘This will probably more a lack of demand and people looking to sell having to adjust their price expectations,’ Mr Lawless said. 

A 0.25 percentage point increase will see monthly repayments on a typical $600,000 mortgage to climb by $78, from $2,306 to $2,384.

That’s based on a bank passing on in full the RBA increasing, pushing up a popular variable rate from 2.29 per cent to 2.54 per cent. 

How much you could be paying on your loan by 2023

$500,000: Monthly repayments rising by $521 from $1,922 to $2,443

$600,000: Monthly repayments rising by $625 from $2,306 to $2,931

$700,000: Monthly repayments rising by $729 from $2,691 to $3,420

$800,000: Monthly repayments rising by $833 from $3,075 to $3,908

$900,000: Monthly repayments rising by $937 from $3,459 to $4,396

$1,000,000: Monthly repayments rising by $1,042 from $3,843 to $4,885

Data based on variable rate rising from 2.29 per cent to 4.19 per cent before the Reserve Bank of Australia raised the cash rate

 

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Source: DailyMail

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