The Reserve Bank of Australia (RBA) has made another 25bps hike in November, bringing the cash rate to 2.85%.

This has been the central bank’s seventh consecutive month of increases since May.

The decision was in line with the prediction of the major banks.

Here are the highlights of RBA Governor Philip Lowe’s latest monetary policy statement

On inflation:

  • Inflation remains “too high” in Australia — over the year to September, CPI inflation was 7.3%, the highest in more than three decades.
  • Further increase in inflation is expected over the months ahead, to peak at around 8% later this year.
  • Inflation is set to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

On the economy:

  • Australian economy is growing solidly, with the national income being supported by a record level of the terms of trade.
  • Growth, however, is likely to moderate over the year ahead as the global economy slows down, and the growth in household consumption eases.
  • RBA’s central forecast for GDP has been revised to 3% this year and 1.5% in 2023 and 2024.

On the labour market:

  • The unemployment rate was steady at 3.5% in September.
  • Job vacancies and job ads are both at high levels.
  • The forecast is fore the unemployment rate to remain steady but to gradually increase to above 4% in 2024.

On uncertainties, impact of rate rises:

  • The deterioration of the global economy remains a source of uncertainty.
  • How household spending responds to tighter financial conditions will also be a key uncertainty.
  • The RBA recognises that monetary policy operates with a lag and that the full effect of the increase is yet to be felt in mortgage payments.
  • Higher interest rates and higher inflation are putting pressure on the budgets of many households.
  • Consumer confidence has also fallen, and housing prices have been declining following the earlier large increases.
  • Households have built up large financial buffers and savings rate remains higher than it was before the pandemic.

On future monetary policy decisions:

  • The RBA recognises that it has increased interest rates materially since May, which is necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to the 2% to 3% target.
  • The size of timing of future rate increases will depend on incoming data and the assessment of the outlook for inflation and the labour market.
  • The RBA says it remains “resolute” in its determination to return inflation to target band.

Spending likely to get more affected by rate rises

A new study from Joust found that 100% of mortgage brokers believe that rising interest rates have a more significant impact on spending habits than on mortgage repayments and property costs.

Joust CEO Carl Hammerschmidt said around 50% of brokers suggested the cash rate will rise by 4% or more over the next 12 months.

“What’s interesting is that there are still a range of opinions on how high rates will go over the next year,” he said.

“I wholeheartedly agree with the key sentiment coming out of the survey, with most brokers encouraging borrowers to focus on wise spending and to borrow with a bigger buffer than what a bank servicing calculator may allow.”

Photo by By Vlada Karpovich from Pexels.