The Reserve Bank of Australia (RBA) has increased the official cash rate target by 25 basis points to 4.10%, marking the twelfth increase in 13 months and taking rates to the highest level in 11 years. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4%.
Key Takeaways
- Rates will increase by 25 basis points to 4.10%
- The increase is the 12th increase in 13 months, the highest rate in 11 years
- RBA Governor Philip Lowe says inflation is still too high
- Labour market conditions have eased, but they remain “very tight”
- The AUD has jumped as the central bank made way for extra tightening
The Reserve Bank of Australia (RBA) has increased the official cash rate target by 25 basis points to 4.10%, marking the twelfth increase in 13 months and taking rates to the highest level in 11 years. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4%.
Economists were divided on their predictions for the RBA’s decision today. About a third of economists polled by Bloomberg expected a 25 basis-point hike to the official cash rate at this afternoon’s meeting to 4.1% – however, three of the four major banks were expecting no change.
RBA Governor Philip Lowe has remained consistent in his determination to “do whatever is necessary to curb inflation”. Appearing before a senate estimates committee hearing last week, Lowe admitted the war against inflation was far from over.
The AUD jumped following the announcement. It has steadily risen over the past four days after the US House of Representatives passed the debt ceiling bill and in light of the latest RBA tightening.
While the RBA remains committed to its plan to curb inflation, it is at loggerheads with the US Federal Reserve, which is predicted to put rates on hold for the rest of the year.
In making his announcement, Lowe said inflation in Australia has “passed its peak, but at 7% is too high”. He said in a statement that it will be “some time yet before it is back in the target range”. He says the increase will provide “greater confidence that inflation will return to target within a reasonable timeframe.” The board is seeking to keep the economy at an even keel as inflation returns to a 2-3% target range, however, it warns that the “path to achieving a soft landing remains a narrow one”.
“High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment,” Lowe said.
CPA Australia Business Policy Manager Gavan Ord says another cash rate will put further pressure on already financially stressed businesses.
“It is getting increasingly difficult to predict where to invest rates are heading and to plan for the future.”
“Rising wages and higher costs are putting pressure on small business,” Ord says. “We can’t expect them to absorb all of today’s increase.”
Monthly figures released by the ABS last week show the annual inflation rate jumped from 6.3 per cent to 6.8 per cent in April. The next set of quarterly data isn’t due until next month. The RBA forecasts the inflation rate to return back to its target band of 2 to 3 per cent by mid-2025.
Appearing before a senate estimates hearing last week, the RBA’s Lowe said the battle against inflation was far from over.
“Every single family is feeling those cost-of-living pressures, and that’s because over the past year, prices went up 7% and we have got to stop that,” he told the hearing. “I know what we’re doing is painful and it’s very difficult for many people, but it’s necessary.”
Monthly figures released by the Australian Bureau of Statistics (ABS) last week show the annual inflation rate jumped from 6.3% to 6.8% in April. The next set of quarterly data isn’t due until July. The RBA has predicted the inflation rate will return back to its target band of 2 to 3% by mid-2025
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