Interest rates up 25bp in last hike of the year

Yasmine Raso

Senior Journalist, Financial Newswire

6 December 2022

The Reserve Bank of Australia (RBA) has increased interest rates by a widely expected 0.25 per cent in its last rate hike announcement for 2022, taking the cash rate up to 3.1 per cent.

The announcement comes after RBA Governor, Philip Lowe, apologised last week after it was found around 300,000 Australians took out loans six or more times their incomes based on guidance he gave in late 2020 and 2021 that interest rates would likely not rise until 2024.

Promising a change in the RBA’s communication to the public, Lowe said in today’s decision that there has been a “necessary” but temporary “substantial cumulative increase in interest rates since May” this year, in order to “re-establish low inflation” and return it to the two to three per cent target range over time.

“Inflation in Australia is too high, at 6.9 per cent over the year to October,” he said.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.”

“A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”

Lowe also signalled the RBA Board expects to continue to hike interest rates but is not on “a pre-set course”, instead aligning increases with household spending behaviour and global economy outlooks.

“The Board is seeking to keep the economy on an even keel as it returns inflation to target, but these uncertainties mean that there are a range of potential scenarios. The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.”

The interest rate on Exchange Settlement balances was also increased by 25 basis points to three per cent.