The Reserve Bank has raised the official interest rate to 4.1 per cent

The decision by the Reserve Bank of Australia (RBA) to raise the cash rate another 25 basis points to 4.1 per cent has dismayed many experts who now warn that a large number of mortgage-holders will now be facing “terrible pain”.

The 12th rate hike since May 2022 is likely to increase gloomy consumer sentiment, further impede growth, and lead to job losses and greater consumer hardship, they caution.

“I’m already meeting daily with people who now drive Ubers before work, do their regular job and then clean offices later in the evening just to be able to afford their mortgages in metropolitan Sydney,” said property advisor Anna Porter, the founder of Suburbanite.

“Then, at weekends, they rent out their homes on Airbnb and go and stay with their families just to earn a little extra income. A lot of families are already really hurting, and now this will put them in terrible pain. Of course, it’s important to bring inflation down, but we’ve already taken a lot of steps to do that.”

The main driver behind the RBA board’s decision to lift the rate yet again was the jump in the monthly Consumer Price Index to 6.8 per cent in the year to April, up on March’s 6.3 per cent rise.

RBA Governor Dr Philip Lowe has said the bank’s aim was to bring inflation down to the target range of between 2 and 3 per cent, and said further rate rises may be required to bring inflation down in a reasonable timeframe.

A significant contributor to the higher inflation rate according to Australian Bureau of Statistics data was the cost of automotive fuel, but that’s been muddied by the winding back of fuel excise tax relief. Other major cost pressures were housing (up 8.9 per cent), food and non-alcoholic drinks (up 7.9 per cent), transport (up 7.1 per cent) and recreation and culture (up 6.4 per cent).

The RBA’s latest move will cost a borrower with $584,975 mortgage – the national average, according to the ABS – an extra $93 per month, assuming banks pass on the rate rise in full. For a borrower with a $1 million loan, monthly repayments could rise by $160, based on calculations using the Domain Home Loans Repayment Calculator.

Commonwealth Bank head of Australian economics Gareth Aird said the rate rise was a surprise. “It is a way to get inflation down more quickly but it does risk unemployment going up, and they don’t want to do that,” he said.

“They want to keep as many jobs as possible while keeping inflation down, and Dr Lowe has said he wants to do that by mid-2025. So, he has time. But I think the decision of the Fair Work Commission on the minimum wage must have fed into his decision.”

He said most of the economy’s major indicators had pointed to a pause in rate rises. The Wage Price Index rose to 0.8 per cent this quarter, less than the 0.9 per cent the RBA had expected, unemployment increased from 3.5 per cent to 3.7 per cent, the number of job ads came down and the number of applicants for each vacancy rose 7.7 per cent. Business service forward orders had also continued to fall, retail spending was flat and building approvals had collapsed.

“We’ve had a lot of signs that the economy is turning and we don’t want a hard landing,” Aird said. “When you package up all the data, it suggested that pausing the rate would have been a prudent policy move.”

Domain Home Loans chief executive Kareene Koh said she wasn’t surprised by the rate rise because of the continuing inflation figures but it would increase the pressure on mortgage holders throughout Australia, particularly at a time of a rising cost of living.

“Rate rises are a blunt instrument and won’t help the housing crisis, or be in the interests of renters as that’s related more to an undersupply of housing, and rate rises won’t shift that,” she said.

“I feel for the householders who are in a lot of pain, especially for those who are facing their fixed rate expiring soon. But while the RBA has brought rates up quickly, they could also make the decision to bring them down again if the results show they’ve gone too far. That will hopefully be sooner rather than later.”

This latest rise does bring closer the risk of the economy being pushed over into recession, believes independent economist Saul Eslake. “I wouldn’t have forecast a recession before, but this does increase the risk a bit,” he said.

“It will definitely help to bring inflation down more quickly but they also have a mandate to keep as close to full employment as they can too. I would have thought they could have been able to afford to wait and see what the impact over time had been of all the other rate rises before going again.”

Porter agrees. “This will put more pressure on the economy, with so many rises, so quickly and aggressively,” she said. “There hasn’t been any time to take account of the effects as each rise takes a few months for the banks to make adjustments and people to adjust their budgets.

“This will now dampen the market and have a big impact on family budgets.”