Reserve Bank of Australia lifts cash rate to 3.6 per cent, highest point in almost 11 years

In a widely anticipated move, the RBA board decided to lift the official cash rate by 0.25 of a percentage point to 3.6 per cent, pushing the official cash rate to its highest point in almost 11 years and adding $20 a week to repayments on an average mortgage.

But hopes that the succession of rate increases might soon end have been dealt a blow after the central bank indicated more action may required.

"The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary," RBA governor Philip Lowe said in a statement.

Dr Lowe said the Reserve Bank was "resolute" in its determination to push inflation down to between 2 to 3 per cent, "and will do what is necessary to achieve that".

Treasurer Jim Chalmers admitted the rate hike would intensify the financial pressure on families and businesses.

Dr Chalmers said mortgage interest payments had swollen to $20 billion in the December quarter, up from $11 billion from the same period in 2021.

The treasurer said the government was considering cost-of-living relief in the May budget, "where it can be done responsibly and where we think we can get an economic dividend out of it".

Markets had been tipping the cash rate to peak at 4.1 per cent in August, but the governor's remarks raise the prospect that interest rates may reach 4.35 per cent or go even higher.

Not only would this inflict significant financial pain on a growing proportion of households but increases the risk the economy tips into recession.

But Dr Lowe was unapologetic about the need to drive inflation down.

"High inflation makes life difficult for people and damages the functioning of the economy," Dr Lowe said.

"And if high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment."

The monthly consumer price index released by the Australian Bureau of Statistics showed annual headline inflation reached 7.4 per cent in January, well above the RBA's 2 to 3 per cent target band but down marginally from 7.9 per cent in the December quarter.

The high December reading, particularly the strength of underlying inflation, was viewed with consternation by the Reserve Bank last month and contributed to a much more hawkish tone from the central bank - a stance which has continued despite expectations that inflation has peaked.

But a subtle shift in language from last month suggests only one more rate hike might be likely, according to Betashares chief economist David Bassanese.

While the governor flagged that further monetary policy tightening may be needed, Mr Basssnese said the reference made last month to the need for "further increases" had been dropped, suggesting the central bank was open to the idea that only one further hike may be needed.

"My base case remains that the RBA will raise interest rates again next month, but then pause for at least three to six months to assess the impact of its work, given the inherent lags in which monetary policy impacts on the economy," he said.

But Deloitte Access Economics head Pradeep Philip questioned the need for the latest rate hike, let alone any more.

Dr Philip that, coming soon after the release of figures showing both growth and inflation were slowing faster than expected makes "the wisdom of this decision hard to understand".

He said the string of hikes had increased the financial pressure on households "while increasing the chance of an unnecessary recession".

Dr Philip called for a greater role for fiscal policy in fighting inflation, adding that, "in the meantime, the RBA should pause rate hikes or it will overshoot and cruel the economy".

Dr Lowe admitted that the path to achieving a "soft landing" for the economy was "a narrow one".

He said that the full impact of previous rate hikes was yet to be felt in mortgage repayments and there was uncertainty about how deeply and quickly household spending would slow.

"Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living," the governor said.

He noted that the labour market remained "very tight" and wage growth was accelerating.

Though recent data suggested the risk of "prices and wages chas[ing] one another" had eased, the central bank was alert to the possibility of a prices-wages spiral developing.

THE COST-OF-LIVING CRUNCH:

The aggressive cycle of rate hikes that began last May has hit millions of borrowers hard, adding more than $1100 to monthly repayments on an average $600,000, 25-year loan.

Opposition treasury spokesman Angus Taylor accused the government of failing to act to help families being hit hard by the succession of rate hikes.

"We've got a Labour government whose only plan for cost-of-living pressures is more taxes, and breaking election promises," Mr Taylor said.

Dr Chalmers said the government would act with restraint and added that recent "modest but meaningful" changes to superannuation tax concessions would improve the budget's structural position.

Incoming national security of the Construction, Forestry, Mining and Energy Union Zach Smith slammed the central bank over its decision.

"These rate rises are causing unbelievable pain to blue collar workers and their families. I know these workers live a long way from Martin Place, but the RBA needs to consider what their day-to-day realities look like," Mr Smith said.

The union leader called for action to capture more of the profits of corporations rather than slugging households.

"The RBA's model is broken and we need to do more than tinker with its charter - we need a complete refresh," Mr Smith said.

READ MORE: Australian borrowers struggling with repayments ahead of expected rate rise