As expected the Reserve Bank of Australia raised its cash rate target by 50 basis points to 2.35%.
They haven't changed their view of where CPI inflation will rise to in 2022 at 7.75% which is up from the June rate of 6.1%. They don't see it receding back into their policy target range until 2024. That probably means more rate rises are ahead to ensure that happens.
It is also clear they regard the situation as fragile and "keeping the economy on an even keel" is a clear goal. Higher interest rates eat into household budgets sharply in Australia and with household debt high, higher rates will threaten that "even keel".
On the news, the Australian dollar was briefly volatile, but then quickly reverted to the general level it was prior to the announcement. Bond market yields rose two to four basis points with only a very minor steepening.
From here, a lot will depend on how US markets assess the direction. It seems unlikely however this +50 bps rise will change anything priced in. Markets had priced in +46 bps of today's +50 bps rise, so a small adjustment was to be expected. Those same markets have priced in only +37 bps for the October 4 review and that seems light in the circumstances.
The NZ dollar rose slightly after the RBA statement.
Here is their official Statement:
At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 2.35 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 2.25 per cent.
The Board is committed to returning inflation to the 2–3 per cent range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments. The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia's invasion of Ukraine, and the COVID containment measures and other policy challenges in China.
Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead. Global factors explain much of the increase in inflation, but domestic factors are also playing a role. There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.
Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range. The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank's central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.
The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring workers. The unemployment rate declined further in July to 3.4 per cent, the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. Beyond that, some increase in the unemployment rate is expected as economic growth slows.
Wages growth has picked up from the low rates of recent years and there are some pockets where labour costs are increasing briskly. Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.
An important source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining in most markets after the earlier large increases. Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages. Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic. The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.
The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy. Price stability is a prerequisite for a strong economy and a sustained period of full employment. The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
24 Comments
These sort of rises are a waste of time Yvil, inflation is being left to hopefully correct itself. They were jawboning "Transitory" because that was their only hope. We are going to be stuck in the 7's and some countries are going double digits real fast. All far to slow I'm afraid to rein it in, they have no choice but to quit the rises soon as well because the economy will fall over otherwise.
Anyone know why the interest rates in a number of European countries are still so low?
For example, in Sweden, where my brother lives, they have increased from 0.25 early in the year to 0.75. But only 0.75.
Thoughts on how this can be sustained in such inflationary times???
Well... I am italian.
I can guarantee you that no Italy => no Euro => no Europe
Greece, Portugal, even Spain, they can be sacrified, last resort, but not Italy.
And no, Italy cannot afford higher rates.
ECB is in a reaaaaaallly bad position right now
The joices of a common central bank :D
I don't know anything about how the Euro monetary system works. So the common central bank has a big influence on interest rates of member states? And hence they are all about 2% or so?
So you are suggesting that Italy could not survive big interest rate hikes - that would bring the Euro down. So high inflation is the lesser of the two evils.
Have I got that right?
God, what a bind.
Is Sweden a member of the EU? If not it can paddle its own waka. Has Sweden joined in the energy sanctions against Russia? If not it'll be getting cheap Russian gas.
So depending on the answers it may indicate why it can keep interest rates low as inflation is perhaps not as bad as in other EU countries
They're in a similar boat to Japan, their economies have been fairly stale for decades, so they've experimented with super cheap lending to try and maintain a stimulated economy.
So their worry seems to be killing their already fragile economies for the sake of trying to halt inflation.
The RBA and the RBNZ seem to be in a sort of containment mode. They have to follow the US Federal Reserve or our currencies will slip further and inflation be that much worse. The Fed seem to tasked with using US dollar hegemony to bring the world to heel.
At least both of our countries have real businesses producing real stuff and, critically, produce more food then we eat.
The US, Canada and Europe seem to be collapsing, their parasitic governments issue debt they believe they do not need to repay. Meanwhile their populations are distracted by war games (GMO and conventional) played by their despotic leaders. Hence the rampant supply side inflation. Will people wake up and reject the narratives they are bathed in? Just how bad does it get?
Yes, except that the climate change response that is advocated is a massive scam, transferring resources to an unaccountable few. We are encouraged to fight amongst ourselves about what is the best response, while our pockets are picked of our inheritance. Each of the choices we are presented with end up with the same result, as they confiscate and centralise our wealth.
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