Home buyers warned by RBA to expect more interest rate pain

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Home buyers warned by RBA to expect more interest rate pain

By Shane Wright

Home buyers could be slapped with an extra $200 in monthly mortgage repayments within weeks as the Reserve Bank considers a further increase in official interest rates amid warnings the battle to control inflation could drive Australia into a mild recession.

RBA governor Philip Lowe on Tuesday said the bank would consider a 0.25 percentage point or a 0.5 percentage point rise in official interest rates at its July 5 meeting with further rate rises likely in coming months.

RBA governor Philip Lowe says the bank board will consider a 0.25 percentage point or 0.5 percentage point rate increase at its July 5 meeting.

RBA governor Philip Lowe says the bank board will consider a 0.25 percentage point or 0.5 percentage point rate increase at its July 5 meeting.Credit:AAP

The bank has lifted interest rates at its two most recent meetings, taking the official cash rate to 0.85 per cent from 0.1 per cent. Financial markets expect the bank to take the cash rate to almost 4 per cent by year’s end.

A 0.5 percentage point increase next month, which economists expect, would add $209 to the monthly repayments on an $800,000 mortgage. It would be on top of this month’s 0.5 percentage point increase.

The RBA has never delivered back-to-back 0.5 percentage point rate increases since gaining formal independence from the federal government.

Lowe, speaking to the American Chamber of Commerce in Australia at a function in Sydney, said higher interest rates were necessary to slow spending across the economy that was adding to the nation’s inflation pressures.

“As we chart our way back to 2 to 3 per cent inflation, Australians should be prepared for more interest rate increases,” he said.

“The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation.”

Lowe downplayed the financial market expectation of a 4 per cent cash rate, saying such an aggressive tightening of monetary policy would have substantial economic impacts.


He said the bank could not allow inflation to become entrenched, warning large increases in prices hurt the nation’s most vulnerable while driving down the purchasing power of people already struggling because of moderate wages growth.

Concerns are growing the United States, where the central bank last week increased official interest rates by 0.75 percentage points, may end up in a recession that would drag on global growth.

Lowe argued the current economy was “fundamentally sound” with very low unemployment and strong household spending, rejecting suggestions even moderate interest rate rises will drive the country into recession.

“I don’t see a recession on the horizon here,” he said.

But Deutsche Bank Australia chief economist Phil O’Donoghue said the RBA’s tighter monetary policy stance would probably start pushing unemployment up by the middle of next year.

He said the jobless rate, forecast to fall to 3.75 per cent by year’s end, could climb to 4.75 per cent by December 2023.

“If it proves accurate, a one percentage point rise in the unemployment rate within a year, we would describe that as a recession, even if Australia manages to avoid two consecutive quarters of negative growth,” he said.

“Against this backdrop, we now expect the RBA to be easing by late 2023. We pencil in 25 basis point rate cuts in November and December 2023.”

The RBA, in its most recent economic forecasts, is expecting a slowdown in economic growth over the coming year, from 4.2 per cent through 2022 to 2 per cent through 2023. But unemployment is tipped to remain below 4 per cent across both years.

Treasurer Jim Chalmers, who is working on a new budget for the 2022-23 financial year, downplayed talk of a recession.

“We’re not working on the expectation at this point of that risk occurring or eventuating. I’ve said a number of times, we have reason to be cautiously optimistic about the future of our economy, but first we have to navigate these difficulties which are right ahead of us,” he said.

Barrenjoey chief economist Jo Masters said she expected the RBA to follow a 0.5 percentage point rate rise next month with a similar increase in August and then quarter percentage point hikes in September, November and February.

“The intensifying domestic inflation risks and potential for that to feed through to inflation and wage expectations, alongside the global backdrop, suggest we will see a sprint to get the cash rate to around ‘neutral’, rather than a patient walk,” she said.

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