In its first cash rate announcement for 2023, the Reserve Bank of Australia (RBA) spiked the cash rate to 3.1% today.

The 25 basis points (bp) rise was expected - but it still resulted in groans across the nation from mortgage holders and keen property buyers alike - to say nothing of households already struggling with high cost-of-living expenses.

Also unsurprisingly, the ninth consecutive rate increase - after the first spikes began in May 2022, following an 18-month stall of 0.1% between November 2020-April 2022 - was a major result of the surprisingly high CPI increase (1.9%) in the December 2022 quarter.

Announced on January 25 by the Australian Bureau of Statistics, the country's annual CPI now stands at 7.8% - the fourth consecutive quarter to show a rise greater than any seen since the introduction of GST in 2000, said ABS head of prices statistics, Michelle Marquardt.

"Global inflation remains very high..."

Explaining the RBA board's decision to up the ante again on the national cash rate, RBA governor Phillip Lowe again pointed to "very high" inflation - and not just the Australian figure, but that of the world.

Dr Lowe noted that the 7.8% CPI figure was the highest since 1990 with inflation's "underlying terms" of 6.9% also higher than expected.

"Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy," he said.

Dr Lowe now remains keen to return this figure to the RBA target of 2%-3%.

"High inflation makes life difficult for people and damages the functioning of the economy," he said.

"And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later."

And as he noted in his December 2022 cash rate announcement, the RBA head also still doesn't like the nation's unemployment figures.

While he says these figures have sat at 3.5% in recent months - the lowest rate since 1974 - the labour market is still "very tight".

"The central forecast is for the unemployment rate to increase to 3.75% by the end of this year and 4.5% by mid-2025," he explained.

".... but inflation expected to decline this year"

Yet in and amongst the 25bps raise bad news, there was some good news too among Dr Lowe's announcement today, including:

Inflation

• Global inflation rate is moderating - in response to lower energy prices, the resolution of supply-chain problems, and the tightening of monetary policy
• Inflation is expected to decline to 4.75% this year and 3% by mid-2025 - due to both global factors and slower growth in domestic demand
• Medium-term inflation expectations remain well anchored

National economy

• The Australian economy grew strongly over 2022
• The central forecast is little changed from three months ago
• The recovery in services spending, following the lifting of COVID restrictions, has largely run its course 
• Tighter financial conditions will constrain spending more broadly

Property market: where to next?

When it comes to mortgage payments, Dr Lowe noted that "the Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments".

So, what now for mortgage holders, and potential property buyers and sellers?

CoreLogic's executive research director, Tim Lawless, concurred - to an extent - with Dr Lowe, in that there is uncertainty about where the cash rate will head to in the near future.

"Mainstream forecasts for the cash rate reflect the uncertainty around inflation outcomes, ranging from the RBA holding the cash rate at 3.35%, through to another 75 basis points of hikes," Mr Lawless said.

"However, a recent survey from Bloomberg puts the median forecast at 3.6%, implying one more hike of 25 basis points in the wings."

There is certainly a concern that today's cash rate hike will take recent borrowers even further beyond the 3% serviceability assessment buffer introduced by APRA in October 2021.

"It’s likely some evidence of rising mortgage stress will start to emerge in 2023 under such substantially higher interest rate settings, with the potential for a more noticeable lift as further fixed rate borrowers migrate over to variable mortgage rates," Mr Lawless said.

He noted that the RBA's quarterly Statement on Monetary Policy, to be released this Friday, February 10, will give the nation further guidance on the outlook for inflation as well as labour markets.

And finally...

Dr Lowe believes it will be "some time" before inflation is back to target rates and advised Australia to expect more interest rate rises in the near future.

"The outlook for the global economy remains subdued, with below-average growth expected this year and next," he said.

"In assessing how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market."

In the meantime, mortgage holders and property buyers and sellers, do need to keep things in perspective.

Think about the following:

• Australia's cash rates haven't increased in over a decade
• Even 3.35% is as nothing when compared to our country's record-high figure of 17% in 1989
• Unemployment's highest ever figure of 11.2% was in December 1992

The RBA's next monthly cash rate announcement will be on Tuesday, March 7, 2023, at 2.30pm AEDT.