More interest rate pain could be ahead for borrowers after the Reserve Bank of Australia warned the highest official cash rate in 11 years may not be enough to tame inflation in the next two years.
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The RBA board raised its central interest rate to 4.1 per cent on Tuesday in a move that means monthly repayments on a typical $500,000 home loan will have increased almost $300 since the start of the year.
Westpac was the first of the big banks to announce it was lifting mortgage rates, revealing it would raise them the full 256 points from June 20. It said its saving rates are under review.
The 12th interest rate hike in little more than a year was widely expected following evidence that although economic activity is easing, it is not slowing fast enough for the central bank's liking. The cash rate is at its highest level since it was 4.25 per cent in April 2012.
Annual inflation eased to 7 per cent in the March quarter after reaching close to 8 per cent late last year, but Reserve Bank governor Philip Lowe said it was "still too high and it will be some time yet before it is back" in the central bank's 2 to 3 per cent target range.
Dr Lowe said growth in the economy was slowing and labour market conditions are gradually easing but the central bank remains concerned about the possibility of wages and prices spiraling.
In a disturbing prospect for mortgage holders and other borrowers, Dr Lowe warned more rate hikes may lie ahead.
"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time," the governor said, adding that Tuesday's hike would provide "greater confidence" about getting it down.
Treasurer Jim Chalmers admitted the rate hike "will make life much harder for people with a mortgage".
"There will be a lot of Australians who will find this decision difficult to understand and difficult to cop," Dr Chalmers said.
But the Treasurer rejected claims that the federal budget or recent pay increases, including the 5.75 per cent minimum wage rise awarded last week, were fueling inflation.
He said the budget was "carefully calibrated" to help ease living cost pressures without adding to inflation and neither were higher wages the problem.
"People on low and middle incomes are already bearing the brunt of these interest rate rises. They shouldn't bear the blame as well," Dr Chalmers said.
Dr Lowe said wages had "picked up" and the central bank was alert to the risk that the longer that inflation stays elevated, the greater the chance that higher wages and prices become embedded in people's expectations.
But he added that current wage growth was consistent with the Reserve Bank's inflation target and would remain so, provided the nation's lacklustre productivity performance improved.
Opposition treasury spokesman Angus Taylor said the latest rate rise made it "very clear" the budget "did nothing to fight inflation".
"This is Labor's rate rise. This rate rise belongs to the government," Mr Taylor said.
There are mounting signs the rate hikes are working to slow demand, including curbing consumer spending.
According to the Australian Bureau of Statistics, household expenditure was up 6 per cent in April, its weakest increase since late 2021.
When the RBA board paused monetary policy in April, there were hopes the peak of the current tightening cycle had been reached.
But since then, official figures have been released showing inflation grew by 7 per cent in the March quarter and the labour market has remained tight.
While many households were under significant financial strain because of high inflation and interest rates, the Reserve Bank is not yet convinced the consumer spending is receding.
In announcing the latest rate hike, Dr Lowe said the central bank would be guided by economic data in determining whether further tightening was needed.
There will be an important update on the economy on Wednesday when the Australian Bureau of Statistics releases the latest growth data.
Commonwealth Bank economists forecast it will show the economy expanded by 2.5 per cent in the year to the March quarter.
But both the government and the RBA forecast a sharp slowdown in gross domestic product in the next 12 months as higher interest rates dampen demand.
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Among the important measures in Wednesday's economic update will be regarding unit labour costs and productivity.
Dr Lowe expressed concern last week about the growth in labour costs without offsetting productivity gains.
ANZ head of Australian economics, Adam Boyton, said the outlook for both were not promising.
Mr Boyton said a further rate hike was likely in August, but admitted the risks were skewed to the central bank having to go further.
Deutsche Bank economist Phil O'Donaghoe has forecast the cash rate could reach as high as 4.6 per cent before the RBA is satisfied it has done enough to tame inflation.
