(July 5): Australia’s central bank delivered its first ever consecutive half-percentage point interest-rate hike and reaffirmed a commitment to do whatever it takes to quell accelerating inflation.
The Reserve Bank of Australia took the cash rate to 1.35% — the highest since May 2019 — in a move that was predicted by all but one of 26 economists polled by Bloomberg.
Tuesday’s tightening was the RBA’s third interest-rate increase in as many months as it follows global peers in moving aggressively to prevent inflation from spiralling out of control. The Australian dollar swung from a gain to a loss on the decision, before recovering to trade 0.1% higher at 68.74 US cents at 3:38pm in Sydney.
“There is no sign today that the RBA is going to do more than what they have been signalling,” said Diana Mousina, a senior economist at AMP Capital Markets. She expects another half-point increase in August and doesn’t see any need for it to follow the Federal Reserve with a 75-basis-point hike.
Bond yields erased gains as investors weighed whether the Australian policy makers have neared a peak in their hawkishness.
“The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates,” Governor Philip Lowe said in a statement after the decision. “The board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.”
Lowe has warned previously that the benchmark rate may go to 2.5% while money markets pricing implies a high point this year of about 3.2%, raising concern the economy could tip into recession.
Mousina noted that variable-rate home loans are more prevalent in Australia than the US, where long-term fixed mortgages are common, and that the RBA’s 125 basis points of hikes since May will have a quicker impact on demand.
So far, consumption has been robust, with recent card-spending data from Australia’s biggest banks suggesting another solid month of sales in June. Moreover, job vacancies are at record highs, indicating further falls in unemployment that’s already near the lowest in almost 50 years.
Yet the rising trajectory for interest rates comes at a time of surging cost of living for Australian households, who have seen the debt-to-income ratio hit a record high of 187%.
Australian Treasurer Jim Chalmers said the decision is “very challenging news” for households already doing it tough. Australia’s populous eastern seaboard has been battered by torrential rain and flooding for much of this year, pushing up food prices at a time when electricity and gasoline costs are also surging.
Economists have been rushing to downgrade forecasts for growth in the A$2.1 trillion economy in recent weeks, including a projection by Nomura Holdings Inc for a recession.
“Today’s increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic,” Lowe said in the statement. “The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.”