“The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic,” he wrote.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

According to Lendi Group chief executive David Hyman, this is a “historic” moment, given that it is the first time in nearly 12 years that the RBA has increased the official rate. It was, however, inevitable, he said, given that annual consumer price inflation has hit a 21-year high of 5.1 per cent.

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Explaining the decision

PropTrack economist Paul Ryan said that inflation has “proven to be both stronger as well as broader than the RBA expected, indicative of stronger domestic demand. There have also been increases in measures of inflation expectations, and significant reporting of inflationary pressures.”

“The RBA’s internal indicators of wages growth have also picked up, so they expect official indicators of wage growth to follow shortly,” he said.

“By moving today, rather than waiting for further data in June, the RBA is signalling that it will intervene to curb stronger than expected inflationary pressures, despite the ongoing federal election campaign. While the RBA seeks to remain independent from politics, failing to adjust policy may have been viewed as a greater political intervention.

“[This increase] signals the start of a series of interest rate rises before the end of 2022.

“This will weigh on housing price growth, which has clearly slowed in anticipation of these higher borrowing costs. The outlook for housing prices later in the year is one of a balance between higher mortgage rates and the higher income growth the RBA is looking to see before raising rates.”

More rate rises coming

In the current climate, Mr Hyman posited, it is likely that the cash rate will continue to rise between 2 and 3 per cent over the next 12 to 18 months, marking a near 200 to 300 basis point increase from the 0.1 per cent rate.

“There’s a generation of homeowners that have never experienced a rate hike and naturally many will have questions on how this impacts their current home loan and financial circumstances,” he said.

“From movements within the industry we know 40 per cent of all outstanding loans are on fixed rates which generally have a higher revert rate and a sizable portion are due to expire this year – with fixed rate mortgages rolling over to variable rates many Aussies will have to start considering their refinance options sooner rather than later.

“Both fixed and variable rates have been fluctuating for some time now, despite the RBA holding on to the cash rate, and there are a number of opportunities for mortgage holders to get ahead of their finances in a rising rate environment. This includes considering refinancing and taking advantage of lower interest rates while they last.

“While we have seen a slight increase in home loan refinancing activity over the past 18 months, the reality is $500 billion of loans haven’t been touched in more than five years according to insights from the Boston Consulting Group – this lack of action could cost Australians down the line.

“A home loan is a long-term investment, and its important homeowners are reminded of this. Now is certainly the time for Australians to check in with their broker, as ultimately, they’re the ones with the industry knowledge that can help their clients best by capitalising on the favourable rates that are in the market right now.”

Wage Price Index

CreditorWatch chief economist Anneke Thompson noted that the RBA would now be “keenly” waiting on Wage Price Index data from the ABS and average earnings in the national accounts, released on 18 May and 1 June, respectively, to decide on their next move after the June meeting.

“At the April board meeting, governor Lowe stated: ‘Over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs. The board will assess this and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target.’ It is likely the board will maintain its position that this data will be a key informant in regards to the velocity of future rate rises,” Ms Thompson said.

“Even if upcoming wage data shows an increase on the current pace of growth of 2.3 per cent, it is a near impossibility that it will be anywhere near the latest inflation figure of 5.1 per cent. This means that the data is almost certain to show that real incomes are going backwards. Nevertheless, the RBA will take comfort if they see at least some momentum gaining in wages growth. If we see wage price growth with a ‘3’ in front of it, this might push the RBA to move the cash rate more aggressively, to try and get the inflation spiral under control more quickly.” 

Looking forward, Ms Thompson continued, there is “much to work through” in getting inflation under control.

“A lot has been spoken about supply chain blockages, labour supply issues, floods affecting agricultural markets and the impact of the war in the Ukraine. However, the extra liquidity provided to the market as part of the COVID-19 response is most certainly having an impact on inflation,” she advised.

“Most developed economies were flooded with cash during the pandemic, which alleviated short term economic pain and certainly kept workers who were unable to work financially afloat, however, the cash is now showing up as higher prices across the board as the world normalises again.

“Australia’s money supply rose by about 22 per cent throughout COVID-19, far less than some other countries, so the good news is we may have a smaller problem to work through than some larger economies, namely the US.”