Reserve Bank lifts interest rates by higher-than-expected half a percentage point, causing more pain for borrowers

Here's our latest coverage from business reporters Nassim Khadem and Rachel Pupazzoni:

The Reserve Bank has increased interest rates with a 50-basis-points or half a percentage point hike, taking the cash rate target to 0.85 per cent — well ahead of most economists' expectations. 

If passed on in full by the banks, the rate rise will add $133 a month on a loan worth $500,000 over 25 years, and $265 a month on a loan worth $1 million.

In early May, the RBA lifted Australia's official cash rate by 25 basis points to 0.35 per cent from 0.1 per cent.

It marked the first rate rise in 11 years — since November 2010 — and forecasts are that the cash rate could hit 2.5 per cent by the end of next year.

If this happens, a borrower with a $500,000 loan balance could see their monthly repayments rise by $652 a month by Christmas next year.

In announcing the decision, Reserve Bank governor Philip Lowe said the rise was in response to the fact that "inflation in Australia has increased significantly".

Annual inflation increased to 5.1 per cent in the March quarter, driven by higher housing construction costs and fuel prices.

Dr Lowe said while inflation in Australia was lower than in most other advanced economies, it was still "higher than earlier expected".

Inflation was expected to increase further, he said, but would then decline back towards its 2 to 3 per cent target range by next year.

"Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago," he said.

"As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.

"Today's increase in interest rates will assist with the return of inflation to target over time."

Dr Lowe said the latest increase in interest rates by the board was "a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic".

"The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed," he said.

"Given the current inflation pressures in the economy, and the still very low level of interest rates, the board decided to move by 50 basis points today."

He said the Reserve Bank would likely keep raising rates over the months ahead.