The cost-of-living crunch will worsen before it eases, Treasurer Jim Chalmers has warned, after surging inflation pushed the Reserve Bank into a higher-than-expected interest rate hike.
Dr Chalmers said the rate rise was "very difficult news" for households already under strain from sky-high grocery and fuel prices, and staring down huge increases on their power bills.
But he's signalled households will have to wait until the government's October budget for new hip pocket relief, as the Coalition opposition warns against spending which could fuel inflation.
The Reserve Bank board announced a rate rise of 50 basis points on Tuesday afternoon, taking the cash rate to 0.85 per cent.
Economists were predicting a rate hike of between 25 and 40 basis points for what would be the second increase in as many months.
But the board went further as Reserve Bank governor Phillip Lowe conceded inflation was outstripping expectations.
It means the cost of repaying a $500,000 standard variable rate mortgage will rise by $153 a month if retail banks pass on the RBA's increase in full.
Westpac was the first of the banks to pass on the hike, lifting its variable interest rates by the full 0.5 percentage points.
In a statement following the decision, Dr Lowe said higher gas and electricity prices and recent increases in petrol prices meant inflation is "likely to be higher than was expected a month ago".
He said global factors including COVID-related disruptions to supply chains and the war in Ukraine accounted for much of the increase.
There were also domestic factors pushing up prices, including capacity constraints in some sectors and a tight labour market.
Speaking to reporters after the bank's decision, Dr Chalmers confirmed inflation would be running beyond the 5.1 per cent recorded in the latest figures, the highest it's been in 21 years.
In a sobering message for households and businesses, the new Treasurer said there was consensus among economists, the government and the central bank that the inflation challenge would "get harder before it gets easier".
Dr Chalmers was pressed on whether Labor would commit to cost-of-living relief to ease pressure on households, on top of the six-month fuel excise cut and one-off cash handouts delivered in the Coalition's March budget.
The Treasurer confirmed help was on its way, but not until the government handed down its budget in October.
He said the budget would include long-term and permanent relief via changes which would lower the cost of childcare and medicine.
"The Albanese Labor government does not underestimate the serious combination of challenges that we have inherited," he said.
"We will do what we can to alleviate the pressure on Australians who are facing the worst combination of price pressures in their economy."
New opposition treasury spokesman Angus Taylor said the rate rise made for a "tough day" for the 3.5 million Australians with a mortgage.
Mr Taylor, who was energy minister under former prime minister Scott Morrison, warned the Albanese government against "unnecessary spending" which would fuel higher inflation and higher interest rates.
"The Labor government must outline its plan to ease cost-of-living pressures and put downward pressure on inflation," he said.
"Australians can't afford to wait for Labor to get its act together."
Dan Jervis-Bardy
Dan covers federal politics from Parliament House, with a special focus on climate policy and the NDIS. He has previously reported on ACT politics and urban affairs since joining the Canberra Times in 2018.
Dan covers federal politics from Parliament House, with a special focus on climate policy and the NDIS. He has previously reported on ACT politics and urban affairs since joining the Canberra Times in 2018.
