At its monetary policy meeting held this Tuesday, July 5, the Council of the Reserve Bank of Australia (RBA) He decided increase the effective interest rate target by 50 basis points, to 1.35%, as expected. It also increased the interest rate on foreign exchange settlement balances by 50 basis points to 1.25%.
Global inflation is high. It is being driven by COVID-related supply chain disruptions, the war in Ukraine, and strong demand that is putting pressure on production capacity. Global monetary policy is responding to this rise in inflation, although it will still be some time before inflation returns to target in most countries.
The Inflation in Australia is also high, but not as high as in many other countries. Global factors explain much of the increase in inflation in Australia, but domestic factors also play a role. Strong demand, tight labor markets and capacity constraints in some sectors are contributing to upward pressure on prices. The floods are also affecting some prices.
Inflation is expected to peak at the end of this year and fall back towards the 2-3% range next year. As global supply problems continue to ease and commodity prices stabilize, albeit at a high level, inflation is expected to moderate. The rise in interest rates will also help to establish a more sustainable balance between the demand and supply of goods and services. Medium-term inflation expectations remain well anchored and it is important that they remain so. A full set of updated forecasts will be released next month following the release of the CPI for the quarter ending in June.
The The Australian economy remains resilient and the job market is tighter than it has been for some time.either. The Unemployment rate stood at 3.9% in May, the lowest in almost 50 years. Underemployment has also decreased considerably. Both job offers and job advertisements are at very high levels and a further decline in unemployment and underemployment is expected in the coming months. The Bank’s business liaison program and business surveys continue to point to increased wage growth from the low rates of recent years, as businesses compete for staff in a tight labor market.
A source of permanent uncertainty about the economic outlook is the behavior of household spending. The latest spending data has been positive, although household budgets are under pressure from rising prices and interest rates. House prices have also fallen in some markets in recent months, following large increases in recent years. The household savings rate remains higher than before the pandemic and many households have built up large financial reserves and are benefiting from higher income growth. The Board will pay close attention to these various influences on household spending when assessing the appropriate setting for monetary policy.
The Council will also pay close attention to the global outlook, which continues to be clouded by the war in Ukraine and its effect on energy and agricultural commodity prices. Real household incomes are under pressure in many economies and financial conditions are tightening as central banks raise interest rates. There are also ongoing uncertainties related to COVID, especially in China.
Today’s interest rate hike is a further step in the withdrawal of extraordinary monetary support which was put in place to help insure the Australian economy against the worst possible effects of the pandemic. The resilience of the economy and higher inflation mean that this extraordinary support is no longer necessary. The Council hopes to give further steps in the process of normalizing monetary conditions in Australia in the coming months. The size and timing of future interest rate hikes will be guided by incoming data and the Board’s assessment of the outlook for inflation and the labor market. The Board is committed to doing whatever is necessary to ensure that inflation in Australia returns to target over time.
Source: Fx Street