The Reserve Bank of Australia has lifted its key interest rate for a fourth straight month, hoisting the cash rate by 50 basis points in its fastest tightening action in almost 30 years to quell inflation.
The RBA decided to raise the cash rate to 1.85% after its monthly board meeting on Tuesday. The four rate rises bring the increase to 1.75 percentage points, or the most since 1994. Most economists had tipped the 50 basis-point jump.
But the bank’s governor, Philip Lowe, said Australia’s economy would grow slower this year and in coming years than the RBA had forecast in its May statement on monetary policy. The forecast cuts and changes in his comments about future rate rises prompted investors to send the Australian dollar lower against its US counterpart and for shares to pare losses for the day.
Australia’s reserve bank has lagged behind most of its overseas counterparts in raising the cost of borrowing to take some of the impetus out of quickening price rises. The consumer prices rose in the June quarter at the fastest annual pace since the introduction of the goods and services tax at the start of the century.
For an owner-occupier with a $500,000 variable rate mortgage and 25 years to go, a 50 basis-point increase in the lending rate would add about $140 in monthly repayments, according to RateCity. The increases since May would lift monthly repayments by $472, assuming the commercial banks pass on the whole increase.
The treasurer, Jim Chalmers, last week said consumer price inflation was forecast to peak at 7.75% by December. Inflation will not drop back into the RBA’s target range of 2% to 3% until the year ending in June 2024, the treasurer predicted.
Markets moved on Lowe’s comments that included a cut in Australia’s GDP forecasts.
The $A has sunk a bit after the RBA rate decision, as one indication that expectations of more rate increases to come have been tempered by Governor Philip Lowe's dovish comments. pic.twitter.com/ufJK48xPz0
— Peter Hannam (@p_hannam) August 2, 2022
The RBA trimmed its GDP growth forecast to 3.25% in 2022 compared with the 4.25% it predicted in its most recent quarterly statement of monetary policy. The bank will update the quarterly statement for August on Friday.
GDP growth in 2023 and 2024 is now expected to come in at 1.75%. That compares with the May forecast by the RBA of 2% in 2023 and 2% in the year to June 2024.
In the accompanying comments, Lowe hinted that further rate rises are not set in stone.
“Today’s increase in interest rates is a further step in the normalisation of monetary conditions in Australia,” Lowe said. “The increase in interest rates over recent months has been required to bring inflation back to [the 2% to 3%] target and to create a more sustainable balance of demand and supply in the Australian economy.
“The Board expects to take further steps in the process of normalising monetary conditions over the months ahead.”
But he said rates were “not on a pre-set path”.
While economic growth is slowing – as it is in many nations – other components remain on an upswing.
“The labour market remains tighter than it has been for many years,” Lowe said. “The unemployment rate declined further in June to 3.5%, the lowest rate in almost 50 years. Job vacancies and job ads are at very high levels and a further decline in unemployment is expected over the months ahead.
“Beyond that, some increase in unemployment is expected as economic growth slows. The bank’s central forecast is for the unemployment rate to be around 4% at the end of 2024.”
In his response to the rate rise, Chalmers said: “Australians knew this was coming but it doesn’t make it any easier to handle.”
“Loan repayments will bite deeper into family budgets already feeling the sting of high grocery and energy costs.”
The chief economist at the Commonwealth Bank (CBA), Gareth Aird, said the latest statement implied Lowe will be pragmatic about future rate rises.
“We do not believe they are in a rush to take the policy rate much above their estimate of neutral [about 2.5%],” Aird said. “Indeed we expect that once the cash rate gets to around that level the RBA will pause to assess the impact that their policy tightening has had on the economy.”
The CBA maintained its forecast for the cash rate to peak at 2.6%. Instead of forecasting the RBA would hike another 50 basis points in September and then hold off until a 25 basis-point move in November, the CBA now forecasts the three quarter-point moves over the coming three board meetings.
The next data will come on 17 August, when the wage price index for the June quarter will show whether wage pressures amid near 50-year lows in the jobless rate are starting to pick up, Aird said.
