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The Reserve Bank of Australia meets expectations and raises its rates 50 basis points to 2.35%

The Reserve Bank of Australia meets expectations and raises its rates 50 basis points to 2.35%

At its meeting today, the Reserve Board of the Bank of Australia (RBA) decided to increase the interest rate on cash by 50 basis points, to 2.35%, as expected. It has also increased the interest rate on foreign exchange settlement balances by 50 basis points, to 2.25%.

RBA statement

The Council has committed to bringing inflation back to the 2-3% range over time. To do this, it aims to keep the economy in a balanced situation. The path to achieve this balance is narrow and full of uncertainty, especially due to world events. The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, tighter monetary policy in most countries, Russia’s invasion of Ukraine, and COVID-19 containment measures. other political challenges in China.

The Inflation in Australia is the highest since the early 1990s and is expected to continue to rise in the coming months. Global factors explain much of the increase in inflation, but domestic factors also play a role. There are widespread upward pressures on prices due to strong demand, tight labor markets and capacity constraints in some sectors of the economy.

Inflation is expected to peak later this year and then decline back into the 2-3% range. The expected moderation in inflation 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 RBA central forecast is for CPI inflation to be around 7.75% in 2022, just over 4% in 2023 and around 3% in 2024.

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 are having difficulty hiring workers. The unemployment rate continued to decline in July to 3.4%, the lowest rate in almost 50 years. Both vacancies and job announcements 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 has recovered from the low rates of recent years and there are some pockets where labor costs are rising sharply. Given the rigidity of the labor market and the pressures on prices, the Council will continue to pay close attention to the evolution of labor costs and the behavior of companies when setting prices in the future.

An important source of uncertainty continues to be the behavior of household spending. Rising inflation and interest rates are putting pressure on household budgets, and the effects of higher interest rates have yet to be fully felt on mortgage payments. Consumer confidence has also declined and house prices are falling in most markets after the 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. The Board will pay close attention to how these various factors are balanced when assessing the appropriate setting of monetary policy.

Today’s further increase in interest rates will help bring inflation back on target and create a more sustainable balance between demand and supply in the Australian economy. Price stability is a prerequisite for a strong economy and a sustained period of full employment. The Council expects to raise interest rates in the coming months, but does not have a pre-established path. The magnitude and the timing of future interest rate hikes will be guided by data received and by the Council’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



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