The RBA raises its interest rates to 2.60%, 25 points less than expected

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At its meeting today, the Council of the Reserve Bank of Australia has decided to raise its interest rates by 25 basis pointsfrom 2.35% to 2.60%, lower than expected, since the markets estimated an increase to 2.85%. This is the sixth consecutive meeting with rate increases and the highest level reached since mid-2013. The interest rate on foreign exchange settlement balances has also increased by 25 basis points, to 2.50%.

RBA Monetary Policy Statement

The Council is committed to bringing inflation back to between 2% and 3% over time. Today’s rise in interest rates will help achieve this goal and further increases are likely to be necessary in the future. The spot interest rate has increased substantially in a short period of time. As a consequence, the Board has decided to increase the cash rate by 25 basis points this month when assessing the outlook for inflation and economic growth in Australia.

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As in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet it also plays a role.

A further increase in prices is expected in the coming months, before inflation falls back towards the 2-3% range. The moderation in inflation forecast for next year reflects the ongoing resolution of global supply problems, recent declines in some commodity prices and the impact of higher interest rates. Medium-term inflation expectations remain well anchored, and it is important that they remain so. The The Bank’s central forecast is that CPI inflation will be around 7.75% in 2022slightly above 4% in 2023 and around 3% in 2024.

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The Australian economy continues to grow strongly and national income is buoyed by a record level of terms of trade. The labor market is very tight and many companies have difficulties to hire workers. The unemployment rate in August was 3.5%, around the lowest rate in almost 50 years. Both job offers and job advertisements are at very high levels, suggesting a further decline in the unemployment rate in the coming months. Beyond that, some increase in the unemployment rate is expected as economic growth slows.

Wage growth continues to recover from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher. Given the tightness of the labor market and the upward pressures on prices, the Council will continue to pay close attention both to the evolution of labor costs and to the behavior of companies in setting prices in the future.

Price stability is a prerequisite for a strong economy and a sustained period of full employment. Thus, the Council’s priority is to bring inflation back to the 2-3% range over time. To do this, it seeks to maintain the balance of the economy. The path to achieving this balance is narrow and clouded by uncertainty.

One source of uncertainty is the outlook for the world economy, which has deteriorated recently. Another is how household spending in Australia responds to tighter financial conditions. Rising inflation and interest rates are putting pressure on household budgets, and the effects of rising interest rates have yet to be felt on mortgage payments. Consumer confidence has also declined and house prices are falling after previous big rises. In the other direction, people are finding work, earning more work hours and receiving higher wages. Many households have also built up large financial reserves, and the savings rate remains higher than it was before the pandemic.

Today’s further increase in interest rates will help to achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation down again. The Board of Directors expects to continue raising interest rates in the future. It is closely monitoring the global economy, household spending, and wage and pricing behavior. The magnitude and timing of future interest rate hikes will continue to be determined by the data received and for the Council’s assessment of the outlook for inflation and the labor market. The Council remains determined to bring inflation back on target and will do what is necessary to achieve this

Source: Fx Street

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