The Reserve Bank of Australia (RBA) has kept the ball rolling with the rate hikes, increasing the cash rate by 50bps to 1.35%.
Here are the highlights from the latest monetary policy statement by RBA Governor Dr Philip Lowe:
- Inflation in Australia remains high, but not as high as it is in other countries. The local factors that have the highest impact on the current inflation are the strong demand, tight labour market, and capacity constraints in some sectors.
- It is expected for inflation to peak later this year, then descend towards the 2% to 3% target range next year.
- The unemployment rate was at a steady 3.9% in May, the lowest rate in almost 50 years.
- Housing prices have also declined in some markets over recent months after the large increases of recent years.
- Household spending remains a source of ongoing uncertainty — while recent spending data have been positive, household budgets are under pressure from higher prices and higher interest rates.
- Household saving rate remains higher than it was before the pandemic. Households have large financial buffers boosted by the stronger income growth.
- The RBA believes the extraordinary monetary support put in place to help the Australian economy amid the pandemic is no longer needed.
- The RBA is expected to “normalise” monetary conditions in Australia in the coming months.
- The pace at which the cash rate is expected to increase will depend on the outlook for inflation and the labour market.
Dr Lowe said in a speech last week that Australia’s high level of inflation remains a concern for the central bank, and that rate increases are likely to continue over the next few months until inflation returns to the 2% to 3% range.
“We do not need to, nor can we, get there immediately. Australia has long had a flexible medium-term inflation target, which, by design, can accommodate deviations of inflation from target,” Dr Lowe said.
Dr Lowe said the level of interest rates in the country remains low for an economy with low unemployment and high inflation.
“It was no longer appropriate for interest rates in Australia to remain at the COVID-emergency levels,” he said.
“How fast we increase interest rates, and how far we need to go, will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market.”
CreditorWatch chief economist Anneke Thompson said it looks like the RBA is set to continue increasing the cash rate until they are comfortable that inflation is starting to trend down.
“Continued dialogue with major retailers, wholesalers, logistics groups, and construction companies will be essential to gain an understanding as early as possible as to the direction of price movements,” she said.
Ms Thompson believes this will have a surprisingly large negative impact on consumer sentiment, especially as the rates impact house prices.
“Nobody likes falling asset values, but, perversely, it presents an opportunity for the Australian economy,” she said.
“The hope being that the combined impact of the wealth effect and reduced disposable income will bring inflation down faster than in countries where household debt isn’t as high.”
Photo by @chrisliverani on Unsplash