By James Glynn
SYDNEY–The Reserve Bank of Australia announced its 12th rise in interest rates in just over a year on Tuesday, ratcheting up stress levels on an already massively burdened mortgage sector while warning that further increases are likely if inflation remains problematic.
The increase in the official cash rate by 25 basis points to 4.10% took it to its highest level since early 2012. The move followed warnings from RBA Gov. Philip Lowe last week that rising wages and the absence of productivity growth could trigger further increases.
Australia’s Fair Work Commission on Friday announced a 5.75% increase in the minimum wage, arguing that it wouldn’t add to inflation. Still, bets in money markets on further interest-rate increases jumped after the announcement.
The rate increase will also be viewed widely as an implicit rejection of the federal government’s annual budget announced a month ago, which many economists argued would add to inflation because of generous cost-of-living offsets paid directly to households.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve,” Mr. Lowe said in a statement announcing the interest-rate increase.
Consumer prices were 7% higher in the first quarter from a year earlier, which Mr. Lowe said is too high. Recent monthly inflation data has shown price pressures remain stubborn.
Mr. Lowe has warned that weak productivity growth means that any wage increases will directly boost inflation. Updated figures on the country’s productivity performance will be published Wednesday, potentially setting the stage for further hikes if there is no evidence of meaningful improvement.
Overall mortgage costs as a share of income are at their highest level since 1984, says Ben Phillips, associate professor at the Australian National University’s Centre for Social Research and Methods.
Since the RBA started raising interest rates, mortgage costs have increased substantially, with the average share of disposable income going to repayments increasing to 24.7% from 17%, Mr. Phillips said.
The tightening of the policy screws comes as close to one million households in Australia are transitioning from ultralow fixed mortgage interest rates to much higher variable rates, putting a huge strain on household budgets amid the biggest jump in the cost of living in three decades.
“Recent labor market and inflation data made another rate hike inevitable,” said Callam Pickering, APAC economist at global job site Indeed.
“While higher rates are certainly unwelcome, persistently high inflation is simply too dangerous for jobs and income and the overall Australian economy,” he said.
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