RBA Increases Cash Rate by 50 Basis Points Anew
The Reserve Bank of Australia (RBA) raised the cash rate by 50 basis points in July in an attempt to contain inflationary pressures. This is the third consecutive month that the RBA has raised interest rates, bringing the official rate to 1.35 per cent.
What does this mean to the average Australian?
This massive rate hike means that the average borrower needs to shell out a few extra hundred dollars more on top of their monthly mortgage repayments. According to the RBA, these rate hikes were driven by the country’s unexpected inflation rate.
While Australia’s inflation is significantly lower than in most other developed economies, it is higher than what was expected. Several global factors account for much of this increase in inflation. This includes disruptions to supply chains due to the COVID-19 pandemic and the ongoing war in Ukraine.
However, the tight labour market, capacity constraints in some industries and other domestic factors also contribute to the demand-pull inflation. The 2022 Eastern Australia floods have also affected some prices. Inflation is expected to increase further, which could prompt another back-to-back rate hike within the next two months.
Cash rate forecasts for the coming months
Australia’s big four banks have made their forecasts as to how the coming months could unfold.
- Commonwealth Bank of Australia: cash rate to reach 2.10% by November 2022
- Westpac: cash rate to reach 2.10% by the end of 2022
- ANZ: cash rate to rise by 0.50% in August, followed by another two more hikes in 2022
- NAB: cash rate to reach 2% by the end of 2022
Interest rates hike to assist with the return of inflation
While inflation is expected to rise further this year, it is anticipated to go down to the 2 to 3 per cent range in 2023. The global supply chain problems are seen to be resolved, and commodity prices are to stabilise. This will help to moderate inflation. The interest rates hike in July is expected to drive inflation to return to target over time. The latest interest rate increase in July also signals the withdrawal of the unconventional monetary support that was set up to aid the Australian economy during the pandemic.
The Australian economy has grown by 8 per cent in the first quarter and 3.3 per cent over the year. Higher prices of commodities are boosting the national income, and macroeconomic policy settings support growth. However, a huge network of construction work needs to be completed.
The labour market also plays a significant role in the country’s economic growth. The unemployment rate is the lowest in almost five decades at 3.9 per cent. Employment has also grown significantly as companies compete for employees in a tight labour market.
How household spending progresses makes economists think about the uncertainty of the country’s economy. Higher inflation puts increasing pressure on households’ budgets while interest rates continue to rise. Housing prices are still more than 25 per cent higher than before the pandemic but have declined in some markets over the last few months. The household saving rate is also higher than before the pandemic, providing many households with a large financial buffer.
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