Reserve Bank of Australia hikes interest rates by 25 basis points to 3.85 per cent

The Reserve Bank of Australia has surprised the experts by raising interest rates by 0.25 percentage points, taking the cash rate to an 11-year high of 3.85 per cent.

The latest increase after April’s pause marks the 11th rate rise during the past year, flying in the face of the financial markets which had almost unanimously predicted rate rises would remain on hold.

While inflation moderated to 7 per cent in March, from December’s 32-year high of 7.8 per cent, RBA Governor Philip Lowe said it was still too high, being well above the central bank’s 2 to 3 per cent target. 

‘Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,’ he said.

The latest increase means a borrower with an average $600,000 mortgage will see their monthly repayments rise by $95 to $3,555, up from $3,460.

That’s based on a Commonwealth Bank variable rate rising by 25 basis points to 5.89 per cent. 

The 30-day interbank futures market had predicted a pause, and the cash rate peaking at 3.6 per cent, following March’s rate rise. 

The Commonwealth Bank, Australia’s biggest home lender, had correctly predicted an increase, saying this would be the last in this rate rise cycle.

But the Reserve Bank suggested this rate rise may not be the last.

‘Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,’ Dr Lowe said.

Westpac, NAB and ANZ had forecast a pause, but of those three, ANZ was predicting another rate rise in August.