The Reserve Bank of Australia (RBA) has once again increased the official cash rate, taking it to 4.35% from 4.10%. This is the 10th consecutive monthly rate hike by the central bank as it battles high inflation.

 

Why is the RBA Raising Interest Rates?

The RBA is aggressively hiking the cash rate in response to surging inflation. The latest Consumer Price Index (CPI) showed inflation hitting a 32-year high of 7.8% in December 2022.

With inflation well above the RBA’s target band of 2-3%, further rate rises aim to tighten monetary policy and put a dampener on consumer spending and borrowing. This helps cool demand and eases pressure on prices.

The RBA hopes to use higher borrowing costs to reduce inflation and prevent it from becoming entrenched at elevated levels.

 

Impacts on Variable Mortgage Rates

With the cash rate now at 4.35%, there is likely to be a flow-on effect to variable-rate mortgages. Lenders generally re-price variable loans in line with movements in the cash rate.

Most of the major banks have already announced they will pass on the 25 basis point hike in full. This will add around $95 per month in repayments for those with a $500,000 loan.

Higher variable rates reduce borrowing power. Based on current rates, someone earning $100,000 could borrow around 9% less than they could have one year ago.

 

Ongoing Impacts of Further Rate Rises

With inflation still well above the RBA’s target range, economists predict ongoing hikes in 2023. Markets are pricing in the cash rate reaching around 4.1% by mid-2023.

If this eventuates, it would represent at least another 2-3 rate rises of 25 basis points each. This will put pressure on household budgets.

Higher rates could also dampen key parts of the economy like housing and retail. Slowing economic growth may eventually force the RBA to pause or even reverse some rate hikes.

The path ahead will depend on how quickly inflation responds to the RBA’s aggressive tightening cycle so far.

 

Outlook for Interest Rates in 2023

The RBA has signalled it remains committed to returning inflation to the 2-3% target band over time. However, it has dropped previous forward guidance about the size and timing of future hikes.

This gives the central bank flexibility to pause rate rises once inflation starts meaningfully declining. If inflation falls more slowly than expected, further significant hikes are still on the table.

The RBA also indicated it’s paying close attention to how household spending is responding. This means the impact of rate rises on economic growth is being closely monitored.

 

In summary, while further rate rises are likely in the short term, the RBA is now adopting a more flexible, data-dependent approach. The pace of hikes may slow once inflation turns the corner.