Australia raises interest rate that will add to monthly mortgage burden

A move that can be described as global trend barring a few exceptions, the Australian central bank on Tuesday increased the interest rate by a quarter-percentage point to 3.1 percent.

The latest hike by the Reserve Bank of Australia (RBA) is aimed at bringing soaring prices down. But at the same time, it means the interest rate in the country has now reached a decade high level, putting mortgage holders under greater strain.

It is now seventh such hike since May, which has added more than 1,000 Australian dollars ($672) to the monthly cost of an average mortgage. The benchmark rate determines what commercial banks are charged for loans.

Meanwhile, the move follows a smaller than expected quarter-percentage point hike in October that diverged from the aggressive stance of counterparts such as the United States Federal Reserve.

The RBA noted that the labour market remains tight, with unemployment at 3.4 percent in October — the lowest since 1974 — and many firms struggling to hire workers.

According to RBA Governor Philip Lowe, inflation remained too high at 6.9 percent, far above the target of 2-3 percent.

“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role,” he said in a statement.

Lowe said he expected inflation to rise to 8 percent during the final quarter before easing next year. “The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.”

“It is closely monitoring the global economy, household spending and wage and price-setting behaviour,” he added.

Lowe said the central bank remains “resolute in its determination to return inflation to target” and will do “what is necessary to achieve that”.

The move will certainly reinforce the fears that the US Federal Reserve will continue tightening which may push the economy into a recession.

It is these concerns which pushed the US stocks down on Monday. When the session was closed, the Dow Jones Industrial Average was down 482.78 points (1.4 percent) and closed at 33,947.10.

Similarly, the S&P 500 slumped 1.79 percent to settle at 3,998.84 and the Nasdaq Composite 1.93 percent to end the session at 11,239.94.

After a speech last week by Fed Chairman Jerome Powell, markets largely expect the central bank will approve a 0.5 percentage point interest rate increase. That would mark a step down from a series of four straight 0.75 percentage point hikes.

At the same time, Powell also said the “terminal rate,” or point at which the Fed stops raising, likely “will need to be somewhat higher” than indicated at the September meeting. That could mean a fed funds rate that ends up in excess of 5%, from its current target range of 3.75 to 4 percent.

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