Westpac has taken the lead as the first major bank to pass on the full value of the Reserve Bank's surprise rise in interest rates to mortgage borrowers. 

Westpac said it would raise home-loan variable interest rates by half a percentage point from June 21.

That brings the standard variable interest rate for owner-occupiers paying principal and interest to 5.33 per cent.

The equivalent home-loan rate for investors will increase by 50 basis points as well, to 5.88 per cent.

The bank also said it would introduce a term deposit rate of 2.25 per cent for 12 months for savers from June 9, while other deposit interest rates remained under review.

When the banks pass on the rate lift in full, 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.

"We know a change in interest rates affects every budget differently," Westpac Consumer and Business Banking chief executive Chris de Bruin said.

"Our customers have managed their finances carefully during the pandemic, with many putting more funds aside in their savings and offset accounts.

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RBA turns Hawkish 

The RBA has hiked interest rates for the second time in two months, delivering a larger than expected half a percentage point increase.

The rate rise for June is the biggest hike since 2000 and takes the cash rate target to 0.85 per cent in an attempt to curb surging inflation.

The cost of living of living was up 5.1 per cent over the past year which was exacerbated by global supply chain disruptions and the war in Ukraine.

Reserve Bank governor Philip Lowe said inflation was expected to increase further before declining back towards the 2-3 per cent target range next year, indicating more rate hikes were on the way.

The RBA's hawkish move echoed rate hikes from other central banks such as the US Federal Reserve, the RBNZ and the Bank of Canada.

But the jumbo rate rise spooked the local share market, with the ASX 200 plunging 1.5 per cent to 7,096.

Another outsized hike predicted for July

The CBA, Westpac and Deutsche Bank forecasted another half a percentage point increase in July, while ANZ predicted the RBA would hike by a quarter of a percentage point next month and then deliver a half a percentage point increase in August.

"One or two more rate hikes over the remainder of 2022 are possible if the data remain 'resilient' despite all the various pressures facing households," David Plank, head of Australian Economics at ANZ, said in a note.

Although the CBA expected to see the cash rate target at 2.1 per cent by the end of the year, Deutsche Bank said it could hit that target as soon as October.

"At that point, we think the RBA is likely to pause as it assesses the inflation and wages data in the second half of the year against a backdrop of 'neutral' policy settings," Deutsche Bank's chief economist Phil O'Donaghoe said in a note.

CBA economist Gareth Aird said it would take some time for higher rates to put downward pressure on inflation.

"Because there is a lag between changes in monetary policy and the impact on consumer prices," he noted.

"Indeed, upcoming inflation data over the next two quarters will be very strong despite our expectations for an aggressive tightening cycle by the RBA."

'Serious savers need to shop around'

It is expected that other major banks will follow suit in passing on full rate rise to borrowers rather than savers.

RateCity research director Sally Tindall said although Westpac has put a 2.25 per cent 12-month term deposit on the table, "it is hugely disappointing to see the bank has not passed anything onto its existing savings accounts at this stage".

"Savers hoping to get a big boost with the RBA hike shouldn't hold their breath," she said.

"Following the May RBA hike, the banks were quick to hike their home loan rates, yet two out five banks didn't touch their savings rates."

"For the banks that did increase savings rates, in many cases only select accounts were hiked, while others stayed dismally low."

The latest APRA statistics for April show Australian households have a record total of $1.27 trillion in the bank, an increase of $281 billion since the pandemic.

"As a result, serious savers may need to shop around and be willing to jump through a few hoops to qualify for higher interest rates."