Reserve Bank lifts official rate to 3.35% in record ninth consecutive hike to tame inflation

Mortgage holders likely to feel immediate pain but RBA indicates further increases to come in attempt to bring inflation under control

Australia’s central bank has slugged borrowers with another increase in interest rates, extending the record run of hikes to nine meetings in a row as it tries to cut inflation, and indicating there are “further increases” to come.

The Reserve Bank at its first board meeting of 2023 on Tuesday raised its cash rate 25 basis points to 3.35%, its highest level in just over a decade. Most economists had predicted such an increase.

“Global inflation remains very high” RBA governor Philip Lowe said in the accompanying statement.

“It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy,” Lowe said. “It will be some time, though, before inflation is back to target rates” of 2%-3% over time.


In a signal that the RBA sees the cash rate rising by at least another half percentage point, Lowe said “the Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary”.

The RBA began lifting the rates from a record low 0.1% during last May’s federal election after a spike in inflation. The increase dented the Morrison government’s re-election hopes but further rises at every RBA board meeting since have posed new treasurer Jim Chalmers a monthly challenge to explain why debt repayment costs were rising yet again.

Australia’s consumer price inflation was running at an annual pace of 7.8% in the December quarter, the highest in more than 32 years, even with three full percentage points of rate rises by the RBA by then.


Additional monthly mortgages repayments could swell to $1,058 for a typical $500,000 loan compared with pre-May 2022 levels if the RBA were to lift its cash rate by another 50bp to 3.85%, according to RateCity.

Among the major banks, both ANZ and Westpac were predicting 3.85% as the peak interest rate prior to today’s verdict.

Financial markets also priced in a higher RBA rate summit before it declines. The benchmark stock index lost about 0.5% and the Australian dollar gained about a quarter of a US cent to nudge 69.5 US cents after the rates decision.

Ahead of Friday’s release of the RBA’s quarterly monetary policy statement, Lowe also indicated that the consumer price index will take a while to subside to the bank’s target range.

While the forecast of a decline to 4.75% this year is unchanged from the RBA’s previous statement released in November, Lowe added that CPI would recede to “around 3% by mid-2025”, indicating the lengthy glide path ahead.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” he said.

EY chief economist Cherelle Murphy said the RBA was “still uncomfortable with the inflation outlook”.

“The RBA is determined to avoid a prices-wages spiral, which would make their job more difficult in the year ahead,” Murphy said, noting the December quarter wage price index would be “keenly” assessed when it is released by the ABS on 22 February.

“A key risk on the horizon is the ‘mortgage cliff’, as some households roll off very low fixed mortgage rates to variable, resulting in sharp falls in household disposable income,” she said.

Commonwealth Bank (CBA), Australia’s biggest bank, amended its earlier forecast that the RBA’s cash rate would peak at 3.35%. It now expects 25 basis point increases in both March and April, for a top rate of 3.85%.

“Two further 25bp interest rate hikes means the probability of a soft landing for the economy is lowered significantly,” CBA head of Australian economics Gareth Aird said. “The budgets of many home borrowers will be under considerable strain over the coming year.”

ANZ, which now looks to be closer to the mark with its earlier forecast of a 3.85% peak cash rate, is sticking to that forecast.

About 800,000 mortgage holders are scheduled to shift from fixed to variable rates of as much as 6% or more in 2023, said Tim Lawless, head of research at CoreLogic.

Lowe indicated GDP growth this year would be about 1.5% this year and next, a reduction compared with a 2% prediction for 2023 contained in the RBA’s November version of its quarterly monetary policy statement.

Still, the RBA is not expecting a major increase in the jobless rate. In December, the rate was hovering near half-century lows of 3.5%, and the central bank now expects it to edge up to 3.75% by the year’s end and rise further to 4.5% by mid-2025.

The last time the cash rate was at about 3.35% in late 2012, the jobless rate was more than 5% and rising.


Peter Hannam Economics correspondent

The GuardianTramp

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