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Millions of Australian mortgage holders have been dealt a blow to their household budget after the Reserve Bank of Australia (RBA) hiked interest rates at its February meeting on Tuesday afternoon. The central bank unanimously raised the cash rate by 25 basis points to 3.85 per cent.
It’s the first time the RBA has hiked the cash rate since November 2023, after no movement in 2024 and three interest rate cuts in 2025. The hike was largely predicted by pundits and the market and follows a surprise uptick in inflation to end the year.
The consumer price index rose 3.8 per cent annually in December, up from 3.4 per cent in the year to November. The all-important trimmed mean, a measure of underlying inflation, rose 3.3 per cent annually, up from 3.2 per cent.
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While inflation has fallen from its peak in 2022, the RBA board said it had picked up “materially” in the second half of last year.
“While part of the pick-up in inflation is assessed to reflect temporary factors, it is evident that private demand is growing more quickly than expected, capacity pressures are greater than previously assessed and labour market conditions are a little tight,” the board’s monetary policy statement said.
“The Board judged that inflation is likely to remain above target for some time and it was appropriate to increase the cash rate target.”
The RBA’s updated forecasts expect trimmed mean inflation to peak at 3.7 per cent mid this year and remain above the 2 to 3 per cent target range until early 2027. Inflation is then forecast to drop to a little above the midpoint by mid-2028.
These forecasts include the assumption of another rate hike, with the board reiterating it will “do what it considers necessary” to bring down inflation.
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Finder head of consumer research Graham Cooke said the RBA’s hike sent a clear signal that the inflation genie wasn’t back in the bottle just yet.
“Our research showed mortgage stress on average had started to subside – expect it to rise with a vengeance as monthly payments jump,” he said.
“If inflation persists, expect more of last year’s mortgage stress relief to be wiped away.”
Banks are expected to pass on the full 25 basis point increase to borrowers with variable home loans in the days ahead.
For the average $693,802 loan with a 30-year loan term, the increase would add $109 a month and $1,313 a year to repayments.
For larger loans, the hit is obviously higher. A $750,000 loan would increase by $118 a month or $1,420 a year, while a $1 million loan would increase by $159 a month or $1,893 a year.
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