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Melbourne Cup day is tipped to bring interest rate pain for home buyers,with some economists tipping another half percentage point increase.Credit:Jessica Shapiro

The bank has lifted official interest rates from 0.1 per cent to 2.6 per cent since May. During the COVID-19 pandemic it also engaged in quantitative easing,buying up state and federal government debt while also supplying cheap lines of credit to the commercial banking sector.

The sharp rise in interest rates on government debt around the world has left the bank with the biggest loss in Australian banking history,at $36.7 billion. So large is the loss,the bank has negative equity of $12.4 billion.

Almost all of the loss is due to a $44.5 billion drop in the value of the bonds it bought during the pandemic. It was partly offset by the interest it is being paid on all the government debt it now holds.

Lowe said the large loss means the bank will not pay a dividend to the federal government as it slowly rebuilds its own financial stocks,which could take several years. It is the bank’s second successive substantial loss,after a $4.3 billion loss in 2020-21.

While the bank repairs its balance sheet,Lowe made clear the RBA will have to continue lifting interest rates to bring down inflation in a development that will hurt the balance sheet of home buyers and businesses.

“The monetary policy support implemented over the past couple of years has helped insulate the economy from the worst effects of the pandemic,but the challenge facing monetary policy has now changed,” he said.

“The task ahead is to return inflation to target while keeping the economy on an even keel. It is possible to do this,but the path is a narrow one and clouded in uncertainty,not least because of developments elsewhere in the world.”

Data this week showed the nation’sinflation rate has reached a 32-year high of 7.3 per cent,with prices across a large proportion of goods and services rising sharply over the past 12 months. Underlying inflation,carefully watched by the Reserve Bank,reached a record high of 6.1 per cent.

This week’s federal budget forecast inflation to peak at 7.75 per cent by Christmas before edging down. But it is still expected to remain above the RBA’s 2-3 per cent target range until 2025.

Barrenjoey chief economist Jo Masters said the surprisingly high 7.3 per cent result suggested inflation was now a persistent problem that meant the RBA was likely to lift interest rates by half a percentage point next week.

She said the figures also showed that Australia’s inflation problem was similar to other countries where interest rates were also being pushed up aggressively. The Bank of Canada on Thursday morning lifted its key interest rate by another half a percentage point to 3.75 per cent.

“We think a 50 basis point rate hike would show that the RBA is truly responsive to incoming data. The facts have changed. It would also pay a dividend to the Bank’s “determination to return inflation to target and do what is necessary to achieve that”,” she said.

“Resilient household spending suggests that consumers are willing to pay higher prices and firms will be looking to take advantage of that behaviour by passing on price increases and the cost of higher wages.”

Westpac chief economist Bill Evans also expects the RBA to lift rates half a percentage point next Tuesday,saying the new inflation data demanded a strong response.

He said 90 per cent of items measured for inflation had now lifted in price by at least 2.5 per cent over the past year. During the pre-global financial crisis mining boom,only 63 per cent were increasing so quickly.

“We obviously have considerable concerns about the eventual impact of these policies on Australians. Without doubt the Reserve Bank shares those views,” he said.

“But globally,central banks have correctly signalled the overwhelming need to rein in inflation pressures. A delay in achieving that objective will only lead to unnecessary additional
pain further down the road – as Australia experienced during the deep recession of the early 1990s following its failure to address the inflation issue during the 1980s.”

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