For the second consecutive month, the Reserve Bank of Australia (RBA) has raised the cash rate target by 0.25 of a percentage point. This decision comes as inflation refuses to slow down, with the most recent consumer price index from the Australian Bureau of Statistics revealing a 6.8% increase over the year to April. Reserve Bank Governor Philip Lowe has voiced concerns about the rising costs of services like hospitality, which are labour-intensive and susceptible to wage increases.
Westpac, one of Australia’s major banks, responded swiftly to the RBA’s decision by announcing it would pass the rate hike on in full to mortgage borrowers from June 20. Their savings rates, however, are still under review.
Wage growth has seen a spike due to the tight labour market and high inflation. Recent wage rises, including last week’s above-expectation increase in minimum and award wages, have stirred concerns. Although wage growth aligns with the inflation target at an aggregate level, some experts argue that the 5.75% increase in award wages could add to inflation unless matched with better productivity growth.
Federal Treasurer Jim Chalmers warns that this decision will hit many households hard, especially given the increase’s impact on home loan repayments. Specifically, the rise will add approximately $76 per month to the repayments on a $500,000 loan, and double that for a million-dollar 25-year mortgage. Since May of last year, when the RBA began lifting rates from a record low of 0.1%, monthly repayments for those with a $500,000 home loan have increased by around $1,134.
The RBA’s decision has been met with concerns about pushing financially strained households too far, potentially risking recession. This is particularly relevant given the recent rebound in housing prices, which has now spread across most of the nation. However, the RBA is also concerned that rising house prices and higher turnover of housing could drive higher household consumption, which they do not wish to see.
The impact of these rate hikes on millennials, who are often first-time home buyers or carrying significant student loan debt, could be substantial. With the possibility of further rate hikes on the horizon, millennials may face increasing financial strain as the costs of loans and mortgages rise. The higher interest rates, combined with cost-of-living pressures, could lead to a substantial slowing in household spending, potentially impacting the wider economy. As the housing market faces possible downturns, millennials may find their dreams of homeownership further delayed.
The coming months will provide a clearer picture of the long-term impacts of these rate hikes. Meanwhile, RBA Governor Philip Lowe is scheduled to speak at a Morgan Stanley banking event in Sydney, potentially providing further insights into the RBA’s decision.
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