Australia has followed other countries with more increases in interest rates to mitigate inflationary pressures. Economists are predicting more pain for mortgage holders after Australia’s Reserve Bank (RBA) raised interest rates Tuesday for the fifth consecutive month to a seven-year high.
Slower world economic growth is the backdrop to the most aggressive series of interest rate increases in Australia since 1994. China’s economy is slowing, and the U.S. central bank has raised interest rates to subdue soaring prices.
Cost of living pressures were a key concern of voters in May’s federal election and many household budgets remain stretched.
The Reserve Bank of Australia, or RBA, has increased its official rate by 0.5 percentage points to 2.35% to try to tame high inflation, the general increase in the prices of goods and services. In Australia, it is at a 21-year high of 6.1% and experts believe it could reach 7% by Christmas.
Interest rates dictate the cost of borrowing money. The official levels set by central banks, including the RBA, influence rates charged by banks and other financial institutions for home loans and other financing. They also help determine returns for savers, who should benefit from rising interest rates.
But Ivan Colhoun, the chief economist for markets at the National Australia Bank, says mortgage holders will be worse off.
“If we get another half-a-percent, say, before Christmas that will nearly be two-and-three-quarter-percent of an increase in rates in (a) seven- or eight-month period. If you are on a $500,000 mortgage that is about $15,000 extra in interest payments, which is over $1,000 a month. So, that is not a small amount of extra money that households with mortgages have to come up with,” he said.
Central banks manipulate interest rates to, for example, subdue spending by consumers to reduce demand for goods and services to try to curb runaway prices.
In Australia, there is evidence the economy is growing too quickly for the Reserve Bank.
Government figures released Wednesday have shown the Australian economy grew 0.9% in the June quarter and 3.6% in the past year. The growth was fueled mainly by household spending and exports, but does not fully reflect recent interest rate rises.
The RBA said it expects further rate increases later this year, possibly in October.
Unemployment in Australia — another key indicator of the health of an economy — is at its lowest since 1974 at 3.4%.
Exports are booming as demand for energy in Europe and Asia drives up prices for Australia’s coal and liquefied natural gas.
The impact of successive interest rate rises on the Australian economy will become apparent in the months ahead.