Today Morning (7/6/22), the Board of Directors voted to boost the cash rate target by 50 basis points to 85 basis points. In addition, the interest rate on Exchange Settlement amounts was raised by 50 basis points to 75 basis points. This contributed to Australia’s dismal state.
In Australia, inflation Rates falls to a Near Two Year Low with 3.5% skyrocketed. Despite being lower than in most other industrialized economies, inflation is higher than expected. Much of the price increase can be ascribed to global challenges such as COVID-related supply chain issues and the Ukraine situation. Domestic factors such as capacity constraints in certain industries and a tight labour market are also contributing to price hikes. Certain pricing was also affected by flooding earlier this year.
The Australian economy remains strong, with growth of 0.8 percent in the March quarter and 3.3 percent year over year. Household and corporate balance sheets are typically in good shape, company investment is increasing, and there is a significant backlog of construction projects to be completed.
According to the RBI, employment has expanded considerably, and the unemployment rate has dropped to 3.9 percent, the lowest in nearly 50 years. Job openings and job advertisements are at an all-time high, and unemployment and underemployment are expected to reduce further. The Bank’s business liaison programme continues to point to a rebound in wage growth from recent lows as firms compete for workers in a tight labour market.
Given the increased strain on Australian consumer budgets as a result of higher inflation, one source of uncertainty about the economic outlook is how household spending evolves. Interest rates are also rising. Housing prices have declined in numerous places in recent months, but they are still more than 25% higher than they were before the pandemic, preserving household wealth and spending.
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While the core scenario forecasts solid household consumption growth this year, the Board will pay close attention to these various consumption factors as it chooses the best monetary policy setting.
Real household incomes are under pressure in many economies, and financial conditions are tightening as central banks withdraw monetary policy support in response to broad-based inflation. COVID is a source of worry, notably in China.
The Board’s interest rate hike today is another step toward the end of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. This extraordinary support is no longer required due to the economy’s resilience and higher inflation.
Given the economy’s persistent inflationary pressures and interest rates that remain extraordinarily low, the Board decided to raise rates by 50 basis points today. The Board expects to take additional moves toward normalizing monetary conditions in Australia in the coming months. Incoming data and the Board’s assessment of the inflation and labour market outlooks will impact the extent and timing of future interest rate hikes. The Board is determined to doing everything possible to ensure that Australia’s inflation returns to target over time.