The Reserve Bank of Australia (RBA) has increased interest rates for the second month in a row, in a blow for mortgage holders. The central bank raised the cash rate by 25 basis points to 4.10 per cent at the end of its March meeting today.
It was a split vote by the RBA board, with five members voting in favour of hiking and the remaining four voting to keep the cash rate unchanged. It’s only the second time that the board has not handed down a unanimous decision.
In a statement, the RBA board said the conflict in the Middle East had resulted in “sharply higher fuel prices, which, if sustained, will add to inflation”. Short-term measures of inflation expectations have already risen, it said, and there is a “material risk” that inflation will remain above the 2 to 3 per cent target for longer.
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“While part of the pick-up in inflation is assessed to reflect temporary factors, the Board judged that the labour market has tightened a little recently and capacity pressures are slightly greater than previously assessed,” it said.
“Developments in the Middle East remain highly uncertain, but under a wide range of possible scenarios could add to global and domestic inflation.
“In light of these considerations, the Board judged that inflation is likely to remain above target for some time and that the risks have tilted further to the upside, including to inflation expectations. It was therefore appropriate to increase the cash rate target.”
Things have changed dramatically since the last Board gathering in February, with the Iran war sending oil prices surging and adding to inflation expectations.
Inflation was already running high before the US-driven conflict kicked off, with headline inflation at an uncomfortably high 3.8 per cent in January, and underlying inflation coming in at 3.4 per cent.
Australia’s economy is also growing at the fastest rate in almost three years, expanding at an annual clip of 2.6 per cent. The unemployment rate has remained at 4.1 per cent.
Finder head of consumer research Graham Cooke said it was a “tough blow” at a time when Aussie families were already feeling the pinch from a volatile global market.
“Between the rising cost of fuel and now higher mortgage repayments, financial safety nets could be pushed to breaking point,” he said.