Somewhat surprising markets, on 6^th June 2023 the Reserve Bank of Australia (RBA) lifted interest rates by 0.25%. It’s hard to believe that just over a year ago in April 2022, the cash rate was at just 0.10%. But now over a year and 12 rate rises later, the official cash rate is at 4.10%. The decision surprised many, with the majority of experts expecting a pause.

Why the latest increase?

The key driver forcing the RBA’s hand was the inflation rate remaining stubbornly high. The inflation number increased to 6.8% in April from 6.3% the month earlier. As long as real interest rates (lending rate after adjusting for inflation) remain negative, the RBA will feel pressure to keep hiking. The RBA has signalled concerns with the level of inflation for essential services such as energy and rent. In addition, rising wages are also a problem if not matched with productivity growth.

How much further can interest rates go?

In late 2022 when the cash rate was sitting at 2.85%, I estimated in my blog that rates could increase by at least 1%, perhaps more. Well, that has now come to fruition, including the “more” part. How much further from here? This depends on the inflation numbers. If inflation has in fact peaked as hoped, I expect potentially one more rate rise in the next few months followed by a pause. If inflation has not peaked, we could absolutely see multiple rate hikes going forward.

Spare a thought for mortgage holders. A $1 million mortgage holder would now be paying an additional $2,250 per month ($27,000 per annum) since the rate rises began in April last year.

The news is welcomed for self-funded retirees with capital invested in fixed interest investments.