At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 85 basis points. It also raised the interest rate on foreign exchange settlement balances by 50 basis points to 75 basis points.
Inflation in Australia has risen significantly. Although inflation is lower than in most other advanced economies, it is higher than previously expected. Global factors, including supply chain disruptions related to COVID-19 and the war in Ukraine, account for much of this rise in inflation. But national factors are also playing a role, with capacity constraints in some sectors and the narrow labor market contributing to upward pressure on prices. This year’s floods have also affected some prices.
Inflation is expected to rise further, but then drop to the 2-3% range next year. Rising electricity and gas prices and recent increases in gasoline prices mean that in the short term inflation is likely to be higher than expected a month ago. As global supply problems are resolved and commodity prices stabilize, albeit at a high level, inflation is expected to moderate. Today’s rising interest rates will help return inflation to the target over time.
The Australian economy is resilient, growing by 0.8% in the March quarter and 3.3% during the year. The balance sheets of homes and businesses are generally in good condition, there is an increase in business investment and there is a lot of construction work to complete. The configuration of macroeconomic policy favors growth and national income is driven by rising commodity prices. The terms of change are at an all-time high.
The job market is also strong. Employment has grown significantly and the unemployment rate is 3.9 percent, which is the lowest rate in almost 50 years. Job vacancies and job vacancies are at high levels and a further decline in unemployment and underemployment is expected. The Bank’s business liaison program continues 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.
One source of uncertainty about the economic outlook is how household spending is evolving, given the growing pressure on Australian household budgets due to higher inflation. Interest rates are also rising. House prices have fallen in some markets in recent months, but are still more than 25 percent higher than before the pandemic, supporting wealth and household spending. The savings rate of households is also still higher than before the pandemic and many households have accumulated large financial cushions. While the central scenario is strong growth in household consumption this year, the Council will pay close attention to these different influences on consumption while assessing the proper adjustment of monetary policy.
The Council will also pay close attention to the global outlook, which is still clouded by the war in Ukraine and its effect on energy prices and agricultural commodities. Real household incomes are under pressure in many economies and financial conditions are tightening as central banks withdraw support from monetary policy in response to widespread inflation. There are also ongoing COVID-related uncertainties, especially in China.
The current rise in interest rates by the Council is a further step in the withdrawal of the extraordinary monetary support that was launched to help the Australian economy during the pandemic. The resilience of the economy and higher inflation make this extraordinary support no longer necessary. Given the current inflationary pressures of the economy, and the still very low level of interest rates, the Council has decided to move today by 50 basis points. The Council expects 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 hikes will be guided by incoming data and the Council’s assessment of the outlook for inflation and the labor market. The Council is committed to doing whatever it takes to ensure that inflation in Australia returns to its target over time.