Official interest rates in Australia have hit their highest level in almost eleven years after the Reserve Bank of Australia (RBA) instituted the tenth-consecutive increase as the bank seeks to bring inflation under control.

And the bank has warned that further rate rises may be yet to come.

At its monthly board meeting on Tuesday, the RBA increased its official cash rate target by a further 0.25 basis points from 3.35 percent to 3.6 percent.

The increase is the tenth consecutive rise since the bank began the current cycle of monetary policy tightening in May last year.

At this level, official interest rates are now higher than at any other time since May 2012.

For the building industry, the latest increase comes at a time when demand for new home construction has already been impacted by earlier rate increases.

Recent data has shown that the seasonally adjusted volume of loans which are being made to finance either the construction of new homes or the purchase a newly constructed homes fell to fourteen-year lows in January.

Meanwhile, building approvals are at their lowest level in more than a decade.

Whilst the building sector still has a strong pipeline of new housing projects to work through, activity is expected to slow in 2024 after the full effect of the interest rate increases flows through later this year.

In its statement accompanying its decision, the RBA acknowledge that inflation had likely peaked whilst household consumption had slowed and the outlook for new home construction has softened.

It also acknowledged that the full effect of previous rate rises is yet to be reflected in mortgage payments along with the squeeze being placed on some households amid the combination of higher rates and the cost of living.

But it warned that inflationary pressures remain as global inflation remains high despite having moderated and record low unemployment means that the potential for a wage-price spiral remains notwithstanding that aggregate wage growth remains in check for now.

Moreover, the board has stressed that inflation would be costlier to bring under control down the track should inflation expectations become entrenched.

The bank also warned that further rate increases may well be needed to ensure that inflation returns to target.

“The Board’s priority is to return inflation to target, The statement read.

“High inflation makes life difficult for people and damages the functioning of the economy.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. The Board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.

“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing when and 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. The Board remains resolute in its determination to return inflation to target and will do that is necessary to achieve that.”

Building industry lobby groups acknowledged the need to address inflation along with the likely need for further rate increases.

But the industry has called on the government to help rein in inflation through greater fiscal discipline and to pursue other measures to improve the cost and quality of building output.

These include increasing the supply of titled residential land, reducing developer charges and reforming inflexible planning laws.

As for interest rates, industry groups want to RBA to either hold off on further increases in April or to institute only a small increase.

“While we recognise the RBA will likely need to continue to lift interest rates over the next few months to reduce the risk of locking in high inflation, there’s more that can be done to avoid locking a generation out of homeownership and exacerbating our housing supply and affordability challenges,” a statement from Master Builders Australia read.

“Accordingly, to allow for the full impact of these ongoing increases to be realised, we believe that interest rate increases should either be paused in April or consider that any further rate adjustments be more finely tuned with increases of no more than 10 to 15 basis points.

“The pain of high interest rates and high inflation is real and if not controlled, could result in a lengthy period of pain and depressed construction activity.

“Inflation is a hidden tax on everything. It makes people and businesses poorer by eating into our savings and making investments by businesses less attractive. It is particularly bad for construction because of the higher capital requirements for the work we do and how closely construction activity is tied to private sector investment decisions.

“Without actioning sensible fiscal measures, we are likely to see a further reduction in new detached house building and higher density homes, which renters are crying out for.

“We already see these stark impacts in new housing construction. Not addressing the symptoms of inflation now risks these symptoms spilling into other sectors of construction.

“The vast majority of the money for commercial building projects comes from private sector investment. High inflation makes business investment more expensive and less attractive by reducing returns and increasing the cost of inputs.”

“The upcoming federal budget should focus on policies that ensure spending is carefully targeted at boosting productivity for business and allowing for more favourable outcomes when it comes to the cost, quality and quantity of building and construction output.

“Insufficient supply of titled residential land, high developer charges, and inflexible planning laws are also holding back detached house building.”

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