It’s back to the status quo at the Reserve Bank of Australia, with Governor Philip Lowe reigniting the fire beneath mortgage holders by hiking the rates again to an 11-year high 3.85 per cent at the May meeting.

It was the first time in a long time that experts and economists were surprised by the cash rate call. Markets hadn’t priced in a rate increase, while more favourable inflation data and actions of two of the Big Four banks in recent weeks had us all believing the central bank had finished its aggressive rate cycle.

Alas, the RBA hiked rates again. But will the latest rate rise actually put more confidence into the market if rates have now hit a ceiling?

We’ve delved into the commentary and insights offered up by both the RBA and experts.

What did Governor Philip Lowe say at the May meeting?

Lowe’s opening sentence in the May meeting said inflation had passed its peak, which is good news for borrowers, however he noted that at seven per cent it’s still too high.

“It will be some time yet before it is back in the RBA’s two to three per cent target range,” Lowe said.

“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5 per cent in 2023 and three per cent in mid-2025,” Lowe added.

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.”

Lowe said the Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. Lowe also cited the tightness of the labour market, with the unemployment rate at a near 50-year low.

What did the RBA discuss at the April meeting?

The minutes of the April RBA meeting, which are always released two weeks after the rate announcement, were always going to make for interesting reading given the first rate hold in 11 months.

Despite holding, the RBA signalled its intent to raise rates in the near future, listing a number of reasons why the official cash rate would likely have to go up.

For April, the board discussed whether they would continue with the now accustomed 25 bps rate hike, or hold the cash rate at 3.6 per cent. They said the case to hike another 0.25 per cent was founded on the observation that inflation remained too high and the labour market was very tight.

“Members noted that the forecasts produced by the staff in February had inflation returning to the target range only by mid-2025 and that it would be inconsistent with the Board’s mandate for it to tolerate a slower return to target. These forecasts were conditioned on monetary policy being tightened a little further,” Lowe said.

The RBA always takes learnings from overseas, and they noted overseas experience in preceding months raised a concern that high inflation could be more persistent than had been expected.

Of course the RBA held interest rates. Their case for a pause was that the full effects of the rate hikes so far on the economy were yet to be observed, given the lags in the transmission of monetary policy.

“Members discussed the uncertainties surrounding the impact that this historically rapid increase in interest rates would have on the economy. They noted that there were already signs that tighter monetary policy had contributed to a slowdown in the housing market, a material slowing in consumption growth, and financial pressure for a segment of households with housing loans.”

What’s the inflation update?

Annual inflation reduced to seven per cent in the quarterly update released in late April. That was down from the 30-year-high of 7.8% in the December quarter, but slightly higher than analysts expectations of 6.9 per cent.

The monthly CPI data also reads well for the RBA. CPI was 7.4 per cent in January, 6.8 per cent in February, and then down to 6.3 per cent in March.

Despite the month-on-month declines in inflation, Lowe said that a significant source of uncertainty continues to be the outlook for household consumption.

“The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending,” Lowe said.

“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.”

Did the property downturn ending spur the May rate rise?

What may have helped the RBA make a decision to raise rates is the rise in home values over the last few months, which will be a welcome relief for homeowners who have seen both their mortgage rates rise, and their home values decline.

“National established housing prices had steadied in March, following an eight per cent decline from their peak around a year earlier.

“Members observed that it was possible that housing prices would stabilise earlier than previously expected and at a level above the previously forecast trough.”

CoreLogic noted a second consecutive monthly rise in national housing values in each of the four largest capital cities following a near 12-month downturn.

CoreLogic’s Head of Research Tim Lawless says that, although housing considerations aren’t part of the RBA’s mandate, a return to a more positive housing trend could be accompanied by a lift in consumer attitudes, supporting consumption and potentially keeping inflation higher for longer.

“The lift in interest rates could act to dampen some of the recent housing exuberance, although a range of other factors are likely to support the continued stabilisation in home values including low available supply, extremely tight rental conditions and higher demand via net overseas migration,” Lawless says.

“Time will tell whether the latest rate hike is enough to send the recent positive trend in home values into reverse, however our anticipation is the market will continue to level out on the expectation that interest rates have peaked and the imbalance between housing demand and supply will persist for some time yet.”

What has the latest rate hike done to mortgages?

The May cash rate increase will add $82 to the monthly repayment on a $500,000 loan over 30 years, but it is the succession of repayment increases that is hurting borrowers. Canstar’s analysis shows borrowers will be paying an extra $1,133 in monthly repayments or 54% more than April last year.

Canstar’s analysis shows the cumulative increase to the cash rate will see existing borrowers’ home loan interest rates rise from an average of 2.98% in April 2022 to now reach 6.73%, and repayments on a $500,000 loan over 30 years up from $2,103 to $3,236 per month. This means borrowers will be paying an extra $1,133 in monthly repayments or 54% more than April last year.

Where next for interest rates?

While the majority of economists and experts believe the RBA has finished its rate increases, Lowe left the door open for further rate rises, again suggesting “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

More than two thirds of Finder.com.au’s RBA Survey believe the cash rate has peaked. A quarter however believe the cash rate will peak at four per cent or higher.

The panel also forecasts an average cash rate of 3.75 per cent by the end of 2023, 3.25 per cent by the end of 2024, and 2.96 per cent by the end of 2025.