As expected, the board of the The Reserve Bank of Australia (RBA) convened today to weigh up if another interest rate rise was warranted. There was widespread speculation that the RBA would raise rates by another 0.25% to potentially 0.40%. So it caught most people including economists by surprise when they decided to be more bullish and increase the rate by a further 0.50%. Essentially, today’s increase represents a shift in the official cash rate of 0.75% or 75 basis points within a month of the RBA’s previous meeting in May, taking us to an official cash rate of 0.85%.
The Reserve Bank Governor Phillip Lowe pointed to the significant rise in inflation around the country as forcing their hand to act, again citing global factors and Covid related disruptions to supply chains in addition to the war in Ukraine as playing their part to pump up inflationary pressures, just as he did last month. However, domestic factors are playing a role too.
Federal Treasurer Jim Chalmers had warned prior to the RBA official announcement that in the current economic and global climate that interest rate rises were on the horizon.
Governor Phillip Lowe had mentioned in his official statement: “Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today's increase in interest rates will assist with the return of inflation
target over time.”
“The labour market is also strong. Employment has grown significantly and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years. Job vacancies and job ads are at high levels and a further decline in unemployment and underemployment is expected. The Bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.”
As cost of living pressures become exacerbated, the Federal Treasurer has sought to calm some of these concerns by pledging a “cost of relief package” to assist with family budgets which he says will be announced in the new federal government’s first budget in October.
With lenders quick to pass on last month’s rate hike to variable-loan customers, loan submissions data shows borrowers are shopping around for a better deal. Recent lending data from the Australian Bureau of Statistics in fact shows that 41% of all new loans in May
comprised refinances, up from 38% in April, which should come as no surprise.
The RBA has indicated it will take further steps to “normalise” monetary conditions in Australia in the months ahead to further curb any growing inflationary pressures.
* This information is general in nature and not intended to be financial advice.
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