Reserve Bank lifts cash rate to 1.85 per cent

The Reserve Bank has lifted the official cash rate by 50 basis points to 1.85 per cent – its highest level in over six years.

For someone with a $500,000 mortgage at the start of May, with 25 years remaining, the total increase across the four hikes would be $472 a month, according to RateCity.

RBA governor Philip Lowe said the rate rise was a “further step in the normalisation of monetary conditions in Australia”.

“The increase in interest rates over recent months has been required to bring inflation back to target and to create a more sustainable balance of demand and supply in the Australian economy,” he said in a statement after Tuesday’s board meeting.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”

PropTrack senior economist, Eleanor Creagh, said inflation was continuing to run hot and the labour market was tightening with the unemployment rate now sitting at 3.5 per cent.

“This (rise) brings the cash rate target up 175 basis points since May, the fastest increase since 1994,” she said.

“How household spending holds up against a backdrop of higher inflation and falling house prices versus savings and wealth buffers, and hopefully stronger wages growth, will be crucial in determining the loss of conditions in the economy and how high and fast the cash rate rises.”

Anneke Thompson, chief economist at CreditorWatch, said the rate of default by small businesses was expected to rise by a percentage point over the next year.

And the likes of Surfers Paradise in Queensland and Auburn in NSW are likely hotspots for mortgage defaults, flowing on to debt problems for local businesses.

The rate rise came as the value of new loan commitments for housing fell 4.4 per cent in June, but remained at a historically elevated level of $31 billion, according to the Australian Bureau of Statistics.

The value of new owner-occupier loan commitments fell 3.3 per cent in June, while new investor loan commitments fell 6.3 per cent.

The total number of dwellings approved fell 0.7 per cent in June, following a 11.2 per cent rise in May.

By Paul Osborne in Canberra