by The Reserve Bank of Australia has raised its key interest rate for a fourth consecutive month, raising the cash rate by 50 basis points in its fastest tightening in nearly 30 years to curb inflation.
The RBA decided to raise the cash rate to 1.85% after its monthly board meeting on Tuesday. The four rate hikes bring the increase to 1.75 percentage points, or the most since 1994. Most economists had pegged the jump at 50 basis points.
But the bank’s governor, Philip Lowe, said Australia’s economy would grow more slowly this year and for years to come than the RBA had predicted in its May statement on monetary policy. The forecast cuts and changes in his comments about future rate hikes sent investors sending the Australian dollar lower against its US counterpart and for stocks to pare losses for the day.
Australia’s Reserve Bank has lagged behind most of its overseas counterparts in raising borrowing costs to take some of the impetus from rising prices. Consumer prices rose in the June quarter at the fastest annual pace since the introduction of the goods and services tax at the beginning of the century.
For a homeowner with a $500,000 variable-rate mortgage with 25 years remaining, a 50-basis-point increase in the mortgage rate would add about $140 to monthly repayments, according to RateCity. The increases since May will increase monthly repayments by $472, assuming commercial banks pass on the full increase.
The Treasurer, Jim Chalmers, said last week that consumer price inflation was forecast to peak at 7.75% by December. Inflation will not fall back to the RBA’s target range of 2% to 3% before the year ending June 2024, the treasurer predicted.
Markets moved on Lowe’s comments which included a cut in Australia’s GDP forecasts.
The RBA trimmed its GDP growth forecast to 3.25% in 2022 compared to the 4.25% it forecast in its last quarterly statement of monetary policy. The bank updates its 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 RBA’s May forecast of 2% in 2023 and 2% in the year to June 2024.
In the accompanying comments, Lowe suggested that further rate hikes are not set in stone.
Related: Australian property prices are falling at rates not seen since the GFC
“Today’s rise in interest rates is a further step in the normalization of monetary conditions in Australia,” Lowe said. “The interest rate increase in recent months has been necessary to bring inflation back to [the 2% to 3%] goals and to create a more sustainable balance between supply and demand in the Australian economy.
“The board expects to take further steps in the process of normalizing monetary conditions in the months ahead.”
But he said prices were “not on a pre-set trajectory”.
While economic growth is slowing – as it is in many nations – other components are still on the rise.
“The labor market is still tighter than it has been in years,” Lowe said. “Unemployment fell further in June to 3.5%, the lowest in almost 50 years. Vacancies and job advertisements are at very high levels, and a further decrease in unemployment is expected in the coming months.
“Furthermore, some increase in unemployment is expected as economic growth slows. The bank’s central forecast is that unemployment will be around 4% at the end of 2024.
In his response to the rate hike, Chalmers said: “Australians knew this was coming, but that doesn’t make it any easier to deal with.”
“Loan repayments will bite deeper into family budgets already feeling the sting of high grocery and energy costs.”
Commonwealth Bank (CBA) chief economist Gareth Aird said the latest statement suggested Lowe will be pragmatic about future rate rises.
“We don’t think 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 when 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.”
CBA maintained its forecast for the cash rate to peak at 2.6%. Instead of forecasting that the RBA will hike another 50 basis points in September and then hold off on a 25 basis point move in November, the CBA is now forecasting three quarter-point moves over the next three board meetings.
The next data will come on Aug. 17, when the wage price index for the June quarter will show whether wage pressures amid nearly 50-year lows in unemployment begin to pick up, Aird said.
