RBA interest rates: More pain for homeowners as central bank struggles to wrangle inflation

While many have criticised the Federal Government’s spending splurge and its impact on inflation, Treasurer Jim Chalmers says Labor is taking “responsibility for our part of the fight against inflation”.

“We’re helping with the cost of living at the same time as we manage the Budget responsibly and address Australia’s long-standing productivity challenge,” he said.

“We are delivering cost of living relief through the tax system, the health system, and through higher wages because we know people are under pressure.

“Budgets aren’t the primary driver of prices in the economy, but responsible economic management plays a helpful role.

“We’ve found almost $180 billion in savings since coming to Government, there have been savings in all eight of our Budget updates so far and there will be more savings in the mid-year budget update in December.”

A former RBA economist warns the latest increase to the cash rate could plunge Australia into a recession.

University of Sydney’s Luke Hartigan, from the School of Economics, said Michele Bullock’s previous narrow path strategy has not worked, and the RBA is now likely to take a more aggressive stance to taming inflation via higher interest rates.

“This could cause a recession and a dramatic increase in the unemployment rate and further falls in housing prices in early 2027,” Dr Hartigan said.

“While inflation remains outside the target band it risks inflation expectations becoming unanchored which would be very costly to correct.

“Interest rates are a blunt instrument for managing inflation. Governments, both State and Federal, can have a more targeted role in helping to manage inflation by reducing demand pressures in the short-term via increased taxation and reduced spending while also seeking to boost the productive capacity of the economy over the long-term.”

Treasurer Jim Chalmers said the hike today was expected but would be difficult to swallow for many household, who will now cop a fifth increase in their home loan repayments this year.

“It will be difficult news for many Australians who are paying a hefty price for circumstances outside of their control,” Dr Chalmers said.

“Australians are already struggling and this will stretch their budgets even further.

“The full impacts of the previous rate rises earlier this year haven’t been fully felt yet and will slow our economy further when they are.

“Today’s decision was widely anticipated but not unanimous. This is unsurprising given considerable uncertainty in the outlook and risks in both directions.”

Like the RBA, he also said renewed fighting in the Middle East could add to the uncertainty.

“The war is now in its ninth month and its re-escalation is putting sustained upward pressure on inflation, weighing on growth, and its end can’t come soon enough for the global economy.”

The board again pointed again to the unresolved conflict in the Middle East as a threat to the national economy.

“The Middle East conflict remains unresolved, and there are scenarios where inflation is higher and activity lower than forecast,” it said.

“Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation.

“A period of prolonged uncertainty may also cause growth to be lower overseas and in Australia. To date, however, growth in Australia’s major trading partners has been stronger than expected, as the boost from AI-related investment has outweighed the adverse effects of the Middle East conflict.

“In Australia, weak productivity growth continues to constrain potential growth and there are uncertainties about the extent and economic effects of the downturn in the housing market.”

The monetary board acknowledged the impact fuel prices were having on inflation, but still decided to hike.

“Inflation remains elevated and recent data indicate that it is broadly based, it said,just minutes ago.

“The inflation outlook has also been revised materially higher in the updated staff forecasts. This partly reflects higher fuel and other commodity prices affected by the conflict in the Middle East.

“But domestic capacity pressures are also judged to have been a little tighter than earlier thought.

“AI-related investment is driving rapid growth in prices for technology-related goods, and inflation in many goods and services remains high.

“Inflation is now forecast to remain elevated through much of 2027 and is not expected to reach the top of the 2–3 per cent target range until late 2027, around three quarters later than previously forecast.

“This presents upside risks to inflation expectations; some measures are assessed to have risen lately.”

Today’s policy decision was by majority: six members voted to increase the cash rate target by 25 basis points to 4.85 per cent; three members voted to leave the cash rate target unchanged at 4.60 per cent.

Interest rates are now at an 18-year high

Lifting rates to ease inflation is a blunt tool - but the only one the RBA has at its disposal.

It disproportionally hits mortgageholders in the hopes that, with more of their income going to pay off their loan, it leaves them less to spend and prices, therefore, cool as demand comes out of the economy.

The problem is that most households have already tightened their belts. But essentials - like food and fuel - are rising, adding to inflation.

Not much the average mum and dad can do about global oil prices when the US president goes to war in the Middle East.

Many argue families have already done the heavy lifting to rein in inflation and bring it back to within the RBA’s preferred 2 to 3 per cent target range.

Expect Michele Bullock to come under heavy fire if the central bank does indeed raise rates today.

The question: “How much more are you willing to keep whacking families to get the job done?”.

Answers to that on a post card to ...

For households, the real test is whether their budgets can withstand another increase without sacrificing essential spending, draining savings or relying on credit, says Canstar.

Here’s how to check your repayment resilience:

1. Earmark the extra cash: check what your new repayment would look like after another increase and identify where the extra money will come from.
2. Know your breaking point: understand at what rate your budget might hit breaking point. This way, you’ll know when to really hit the alarm.
3. Check up on your emergency fund: work out how long your savings would cover essential expenses if your household income changed unexpectedly.
4. Make breathing room: Find instances in your budget where you can cut back, suspend or delay financial commitments if needed.

Canstar’s data insights director Sally Tindall says the pressure is really starting to mount.

“Borrowers are already under extreme financial pressure after four rate hikes this year. If the RBA ratchets up the cash rate once again, some will hit their financial ceiling,” she said.

“While interest rates could be returning to levels last seen almost two decades ago, today’s borrowers are carrying significantly more debt, making every 0.25 percentage point increase that much more painful.

“For someone with a $600,000 mortgage, another rate hike will mean finding an extra $92 a month to clear their new minimum repayments. However, across what would be five hikes for the year, the total increase would be a jaw-dropping $456.

“That’s almost half a grand in post-tax dollars a fairly typical borrower would have to find, every single month for the foreseeable future.

“The question now is how much more room households have in their finances. Some borrowers will be able to absorb another increase within their current budget, but others may be forced to raid their savings – a finite resource that in a perfect world remains untouched.

“The biggest concern is those with no buffer to fall back on.”