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RBA lifts interest rates 50 basis points to 1.35%

RBA increased interest rates on Tuesday by another 50 basis points
The Reserve Bank of Australia (RBA) increased interest rates on Tuesday by another 50 basis points, bringing the cash rate to 1.35 per cent as it attempts to rein in soaring inflation.
Economics

The Reserve Bank of Australia (RBA) increased interest rates on Tuesday by another 50 basis points, bringing the cash rate to 1.35 per cent as it attempts to rein in soaring inflation.

It is the third consecutive increase by the central bank, following 25 basis points in May and 50 basis points in June. The RBA cautioned that it is resolute in taming inflation, despite admitting global factors “account for much of the increase”.

Pandemic-induced supply chain bottlenecks, the war in Ukraine and robust commodity prices have all contributed to inflation reaching 5.1 per cent in Australia.

  • “Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices”.

    “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time”.

    A careful balancing act

    The Australian economy remains resilient. Unemployment is at a 50-year low of 3.9 per cent. Job vacancies and ads remain high, while households have still accumulated a significant amount of excess savings.

    Nonetheless, the board noted one source of ongoing uncertainty is household spending. Budgets are under pressure from inflation. Furthermore, increasing borrowing costs have led to house prices turning, with Melbourne and Sydney leading the fall.

    For a household on a $500,000 loan, the 50 basis point increase will add upwards of $300 per month to a standard variable rate mortgage repayment. 

    A quarterly survey conducted by the Australian Financial Review of 31 economists anticipates a median cash rate of 2.35 per cent by December.

    “The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”.

    Inflation remains the elephant in the room

    The RBA will next meet on August 2, with the 30-day futures curve suggesting another 50 basis point rise would be on the cards.

    “The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market”.

    A number of key economic indicators will be released before August’s meeting including quarterly Buildings Activity on July 13 and monthly labour force data on July 14.

    However, the most closely watched report will be the quarterly Consumer Price Index and subsequent inflation data released on July 27.

    The RBA expects inflation to peak later in 2022 before declining towards its target band of 2-3 per cent next year.

    “Medium-term inflation expectations remain well-anchored and it is important that this remains the case”.

    Later this year inflation numbers will begin to lap prior year’s comparisons. While prices may remain high, the RBA will be hoping the elevated inflation readings begin to soften.

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