Thursday, September 21, 2023

RBA raises interest rate by 0.5%

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The Reserve Bank of Australia today increased its official spot rate by 0.5% to 0.85% in an aggressive jump that has surpassed market expectations for a 0.4% increase.

The increase follows a 0.25% increase after the May board meeting.

Governor Philip Lowe said the council is concerned about “significantly” increased inflation, which is “higher than previously expected”, in addition to global factors and the impact of local flooding.

“The council will also pay close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on energy and agricultural commodity prices,” he said.

“Real household incomes are under pressure in many economies and financial conditions are tightening as central banks withdraw monetary policy support in response to broad-based inflation. There are also lingering uncertainties regarding COVID, especially in China.”

Lowe said household and corporate balance sheets are “generally good” and the national economy is growing resiliently at 0.8% in the March quarter and 3.3% over the year.

The terms of trade are at a record high and the labor market is also strong. The Bank’s business liaison program continues to point to an increase in wage growth from lows in recent years as companies compete for staff in a tight labor market.

Lowe signaled further rate hikes in the coming months. Many analysts expect inflation in Australia to top 7% and the bank aims to bring inflation back to its target range of 2-3% in the coming year.

“The magnitude and timing of future rate hikes will be determined by incoming data and the board’s assessment of the outlook for inflation and the labor market,” he said.

“Higher electricity and gas prices and recent increases in petrol prices mean that short-term inflation is likely to be higher than expected a month ago. With global supply-side issues resolved and commodity prices stabilizing, albeit at high levels, inflation is expected to moderate. The rise in current interest rates will help bring inflation back to target over time.”

But critics point to the fact that the RBA uses quarterly inflation data when most advanced economies produce monthly data, meaning the central bank is relying on the same March figures for the consumer price index (CPI) for its May rate hike for both June and next month.

Lowe noted that the effect of high inflation and higher mortgage rates on household spending creates significant uncertainty. Despite recent declines in house prices in some markets, they remain at least 25% higher than before the pandemic, supporting household wealth and spending.

“Household savings also remain higher than before the pandemic and many households have built up large financial buffers,” Lowe said.

“While the central scenario is for strong household consumption growth this year, the Governing Council will pay close attention to these various influences on consumption when assessing the appropriate monetary policy setting.”

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