The Reserve Bank of Australia (RBA) has finally lifted the cash rate, ending the era of ultra-low interest rates.

The central bank made a 25 basis point increase to the cash rate target, bringing it to 0.35%.

This was contrary to most predictions of a 15 basis point increase.

It marks the first time in 11 years there has been a hike in the official cash rate. The last time there was a cash rate increase was in November 2010. 

Today's decision comes after last week's surprise inflation result. According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 2.1% in the March 2022 quarter and 5.1% on an annual basis.

In his statement, RBA governor Dr Philip Lowe confirmed there will be more interest rate rises ahead.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead," Dr Lowe said.

"The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases."

Dr Lowe said it's time to turn the "monetary support tap off".

"The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic," he said.

"The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions."

Homebuilding activity likely to ease

Housing Industry Association (HIA) chief economist Tim Reardon said this latest increase in the cash rate would likely cause the home building activity to ease modestly from its elevated levels.

“Unfortunately, the 0.25% increase in the cash rate will do little to arrest the rising cost of building materials,” he said.

“The subsequent surge in demand for building materials, combined with constraints in global supply chains, have caused a significant shortage of building materials across the world — this has seen the cost of key building materials escalate and was a major contributor to recent inflation data.”

While the increase in the cash rate will likely slow the demand for homes, it will not ease the constraints on global supply chains, increase the supply of skilled labour, or improve productivity.

Mr Reardon said this rate increase alone should not have a significant impact on most household budgets.

“It does, however, send an important signal for homeowners and investors considering a home purchase that the period of ultra-low interest rates, is nearing an end,” he said.

Downward pressure on housing growth rates

CoreLogic research director Tim Lawless said the higher interest rates could potentially add to the downwards pressure on housing growth rates, which were already losing steam, or as in the case of Sydney and Melbourne, trending into negative territory due to factors including affordability constraints, higher fixed term mortgage rates and lower levels of consumer sentiment.

“A higher cash rate implies higher variable mortgage rates, a reduction in borrowing capacity and tighter serviceability assessments for prospective borrowers,” he said.

The first to feel the downward pressure could be the higher end of the housing markets with significant investor participation, as this segment is more sensitive to the changes in interest rates in the short term.

“This may be why Sydney and Melbourne markets are already seeing price declines, with more affordable housing markets expected to eventually follow the downward trend.”