At its meeting today, the Board has decided to raise the cash rate target by 50 basis points to 1.35 per cent. It also raised the interest rate on foreign exchange settlement balances by 50 basis points to 1.25 percent.
World inflation is high. It is being boosted by supply chain interruptions related to COVID, the war in Ukraine and strong demand that is pressuring productive capacity. Global monetary policy is responding to this higher inflation, although it will be some time before inflation returns to target in most countries.
Inflation in Australia is also high, but not as high as in many other countries. Global factors account for much of the rise in inflation in Australia, but national factors also play a role. Strong demand, a tight labor market and capacity constraints in some sectors contribute to upward pressure on prices. Floods are also affecting some prices.
Inflation is expected to peak at the end of the year and then fall back to the 2-3% range next year. As global supply problems continue to decline and commodity prices stabilize, albeit at a high level, inflation is expected to moderate. Higher interest rates will also help to establish a more sustainable balance between the demand and supply of goods and services. Medium-term inflation expectations remain firmly anchored and it is important that this is the case. A full set of updated forecasts will be published next month following the publication of the CPI for the June quarter.
The Australian economy remains resilient and the labor market is tighter than it has been for some time. The unemployment rate remained stable at 3.9% in May, the lowest rate in nearly 50 years. Underemployment has also dropped significantly. Job offers and job offers are at very high levels and a further decline in unemployment and underemployment is expected in the coming months. The Bank’s business liaison program and business surveys continue to point to an increase in wage growth compared to the low rates of recent years, as companies compete for staff in a restricted labor market.
A source of constant uncertainty about the economic outlook is household spending behavior. Recent spending data has been positive, although household budgets are under pressure from rising prices and higher interest rates. House prices have also fallen in some markets in recent months following large increases in recent years. The rate of household savings remains higher than before the pandemic and many households have accumulated large financial cushions and are benefiting from stronger income growth. The Council will pay close attention to these different influences on household spending while assessing the proper configuration of monetary policy.
The Council will also pay close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on energy prices and agricultural raw materials. Real household incomes are under pressure in many economies and financial conditions are tightening as central banks raise interest rates. There are also ongoing uncertainties related to COVID, especially in China.
Today’s rise 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. The resilience of the economy and higher inflation make this extraordinary support no longer necessary. The Council hopes to take further steps in the process of normalizing monetary conditions in Australia over the coming months. The size and timing of future interest rate increases will be guided by incoming data and the Council’s assessment of inflation and labor market prospects. The Council is committed to doing whatever is necessary to ensure that inflation in Australia returns to the target over time.