The Reserve Bank of Australia has raised its target for spot interest rates by 25 basis points to 2.6%, its sixth monthly increase in a row.
But the surprise was that most analysts expected a 50-point increase, but central bank boards opted for half that figure.
From the record low of 0.1% in 2020 in response to the Covid pandemic, the RBA has now raised the spot rate by 0.25%, 0.5%, 0.5%, 0.5% 0.5% and now again by 0.25% at every monthly meeting since May. It is the first increases in 11 years.
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 Australian household spending is responding to tighter financial conditions amid higher inflation as a other uncertainty because the full effects of higher interest rates had not yet been felt in mortgage payments.
“Consumer confidence has also fallen and house prices are falling after the previous big increases,” he said.
“By working the other way, people find jobs, get more hours of work, and receive higher wages.”
Lowe pointed to “large financial buffers” in many Australian households, with the savings rate still above pre-pandemic levels.
“The continued rise in interest rates today will contribute to a more sustainable supply/demand balance in the Australian economy. This is necessary to bring inflation back,” said Lowe
“As in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the economy’s ability to meet that demand also plays a role.”
ausbiz anchor David Scutt believed the smaller rise is a sign that the central bank will keep rates higher for longer.
Slowing down reduces the risk of the RBA having to cut rates quickly as part of the boom-bust cycle. Actually points out that the rates stay higher for longer.
— David Scutt (@Scutty) October 4, 2022
The governor said the board expects to raise interest rates again, forecasting CPI inflation to be around 7¾% in 2022, and increase in the coming months, before falling to just over 4% in 2023 and about 3% in 2024, at the top of its target range.
“The magnitude and timing of future rate hikes will be determined by the incoming data and the Council’s assessment of the inflation and labor market outlook,” Lowe said.
Lowe noted that wage growth continues to pick up from the lows of recent years, although it remains lower than in other advanced economies where inflation is higher.
“Given the tight labor market and price pressures upstream, the board of directors will continue to pay close attention to both the evolution of labor costs and the pricing behavior of companies in the coming period,” he said.
Keeping the economy “balanced” while inflation prevails is a narrow path to equilibrium and “clouded in uncertainty,” Lowe added.
The RBA also raised interest rates on Exchange Settlement balances by 25 basis points to 2.5%.
Major lenders have yet to comment on the RBA’s latest decision to lift the rates.