The Reserve Bank of Australia is predicted to announce an interest rate rise of 0.25% to 0.5% today, which could take take the cash rate to 1.85%.
Increases over the past three months have brought the rate from 0.01% to the current 1.35% — the highest level since July 2019.
On July 20, RBA governor Philip Lowe said “further increases will be needed in the months ahead”, in his address to the Australian Strategic Business Forum. The aim is to return inflation to a 2-3% target range with “a more sustainable balance between demand and supply”.
“Higher interest rates will help achieve this through moderating growth in aggregate demand.”
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ANZ and Westpac have tipped the cash rate will hit 3.35% by November. For NAB, the forecast is 2.85% and CBA’s prediction is 2.6%.
Nomura economists are tipping an “against the odds” 0.75 percentage point rise tomorrow, due to strong underlying inflation and low unemployment rate of 3.5%, the AFR reported this morning.
Back in June, money markets forecast the cash rate to peak at 4.5%, but have now significantly wound it back to 3%, “after the US Federal Reserve signalled it could ‘pause’ interest rates following more monetary policy tightening in the current months”, Curve Securities director Peter Sheahan said.
The Commonwealth Bank expects the rate to remain high before cuts in late 2023, while ANZ and Westpac expect cuts by mid-2024.
Last Wednesday, the Australian Bureau of Statistics revealed inflation had surged to 6.1% for the year to June 2022, surpassing the pre-election forecast of 4.25%.
Then on Thursday, Treasurer Jim Chalmers delivered an economic outlook to the House of Representatives that tipped a 7.75% Consumer Price Index by Christmas. Mounting budget pressures and predictions of stagnant wages dominated his update, prompting industry groups to call for action.
The RBA had a “strong insurance mindset” during the worst of the COVID-19 pandemic, but with the emergency “now over”, Lowe said the time for emergency settings of monetary policy must too come to an end.
“The RBA was patient in withdrawing the insurance that was put in place during the pandemic. We wanted to ensure a robust recovery and we were very aware that our main policy instrument — the cash rate — was at the effective lower bound. That robust recovery has taken place and the time for ultra-low interest rates is now behind us given that inflation is high and the labour market is very tight,” he said.
In a July 20 3AW interview with Neil Mitchell, Prime Minister Anthony Albanese warned the RBA to be careful.
“The Reserve Bank will make its decisions based on its assessment of where the economy is at, but it needs to be careful it doesn’t overreach as well,” he said.
Albanese said the predictions of four more rate hikes by the end of the year are “at the pessimistic end of the forecast”.