Reserve Bank of Australia hikes OCR by further 0.25 per cent

Reserve Bank of Australia Governor Philip Lowe.

Australians will take a hit to their finances just before Christmas with the Reserve Bank of Australia raising interest rates by 0.25 per cent again in December.

In the final decision for 2022, the RBA pushed up rates for the eighth consecutive month, after hikes began in May from a record low of 0.1 per cent.

It means rates have jumped again from 2.85 per cent to 3.1 per cent, which will lift the official cash rate to its highest level in 10 years.

The major banks ANZ, NAB and Westpac had all forecast a 0.25 per cent increase, while Commonwealth Bank has also tipped the same rise although said there was a small chance of “no change”.

Last month, the RBA governor Philip Lowe flagged more interest rate increases after he issued a warning about inflation, saying that Australia risks a “severe recession” if the organisation doesn’t lift interest rates to combat the cost of living.

“The eel of inflation will be with us for longer (if we don’t lift rates) and the eventual increase in interest rates needed to bring inflation down will be even larger is would increase the risk of a seed, severe recession, and a sharp rise in unemployment,” he said during a speech to business leaders in Hobart in November.

Inflation is currently sitting at 7.3 per cent, something the RBA has been trying to tackle, as the cost of living increases sit at their highest since the 1990s.

Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.

“If we need to step up to larger increases again to secure a return of inflation to target we will do that,” he said.

“Similarly, if the situation requires us to hold steady for a while, we will do that.

“Given the uncertainties regarding the outlook, we will be watching very carefully how the economy and the inflation pressures evolve over the summer.”

However, there could be some relief in sight for homeowners with some experts predicting the RBA to pause its aggressive round of rates hikes from next year.

HSBC senior economist Paul Bloxham saying there was a real chance the RBA could pause rising rates in early 2023, although hikes could return later in the year if the inflation problem lingers.

However, Morgan Stanley has tipped rates to keep increasing.

“Inflation is likely to show some re-acceleration, wage growth should continue to rise, and while spending and unemployment are likely to begin to turn, both will still be quite strong,” a note from the bank said.

“We forecast further 25 basis points hikes from the RBA in February and March to a terminal cash rate of 3.6 per cent.”

As for Australia’s big banks, CBA has predicted rates to stay at 3.1 per cent, while Westpac and ANZ expect it to peak at 3.85 per cent in May.