Reserve Bank of Australia lifts cash rate 25 basis points as it assesses the outlook for inflation and economic growth

The Reserve Bank of Australia (RBA) has increased its cash rate by 25 basis points to 2.60%.

Financial markets had expected the RBA to lift the cash rate by 50 basis points.

The RBA says it's committed to returning inflation to its 2% to 3% target range over time. Over the 12 months to the June 2022 quarter, Australia's Consumer Price Index (CPI) rose 6.1%. The RBA says its central forecast is for CPI inflation to be around 7.75% over 2022, a little above 4% over 2023 and around 3% over 2024.

"The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia," the RBA says.

"Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher."

The RBA started increasing the cash rate from a low of just 10 basis points in May.

The Australian share market rose on the RBA news and the Aussie dollar weakened. On Wednesday the Reserve Bank of New Zealand is expected to increase the Official Cash Rate by 50 basis points to 3.50%.

Below is the RBA's full statement.

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 2.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 2.50 per cent.

The Board is committed to returning inflation to the 2–3 per cent range over time. Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead. The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.

As is the case in most countries, inflation in Australia is too high. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.

A further increase in inflation is expected over the months ahead, before inflation then declines back towards the 2–3 per cent range. The expected moderation in inflation next year 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 in August was 3.5 per cent, around 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 is continuing to pick up from the low rates of recent years, although it remains lower than in other advanced economies where inflation is higher. 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.

Price stability is a prerequisite for a strong economy and a sustained period of full employment. Given this, the Board’s priority is to return 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 it is clouded in uncertainty.

One source of uncertainty is the outlook for the global economy, which has deteriorated recently. Another is how household spending in Australia responds to the tighter financial conditions. 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 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 still remains higher than it was before the pandemic.

Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.