The RBA’s surprise 0.25% rate increase amid global downturn concerns

- October 4, 2022 2 MIN READ

The Reserve Bank of Australia has lifted its cash rate target by 25 basis points to 2.6 per cent, its sixth monthly increase in a row, writes Simon Thomsen, editor of Startup Daily.

But the surprise was that most analysts expected another 50-point increase, but the central banks board opted for half that figure.

From record low of 0.1 per cent set in 2020 in response to the COVID-19 pandemic, the RBA has now increased the cash rate by 0.25 per cent, 0.5 per cent, 0.5 per cent, 0.5 per cent, 0.5 per cent and now 0.25 per cent again – at every monthly meeting since May. They’ve been the first increases in 11 years.

“Necessary to bring inflation back down”

RBA governor Philip Lowe cited increased uncertainty in the global economy “which has deteriorated recently” as a key reason behind the Board’s decision, along with how household spending in Australia responds to the tighter financial conditions amid higher inflation as another uncertainty; because the full effects of higher interest rates had yet to be felt in mortgage payments.

“Consumer confidence has also fallen and housing prices are declining after the earlier large increases,” he said.

“Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages.”

Lowe pointed to “large financial buffers” in many Australian households, with the saving rate still remaining higher than pre-pandemic levels.

“Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down,” Lowe said.

“As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”

Interest rates will rise again

The Governor said the Board expects to increase interest rates again, forecasting CPI inflation to be around 7¾ per cent over 2022, increasing in the months ahead, before falling to a little above 4 per cent during 2023 and around 3 per cent over 2024, at the top of its target range.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” Lowe said.

Lowe noted that wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher.

“Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead,” he said.

Keeping the economy “on an even keel” while reigning in inflation is a narrow path to balance and “clouded in uncertainty”, Lowe added.

The RBA also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.5 per cent.

Key lenders have yet to respond to the RBA’s latest decision to lift rates.

Feature image: The RBA in Sydney. Photo: Simon Thomsen

This article first appeared on Startup Daily and was republished with permission, read the original here.

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