Australian borrowers hit again as RBA raises interest rates by 25 basis points to 2.85%
Borrowers have been slugged with a record seventh rate rise from the Reserve Bank of Australia in as many months, as the central bank tries to quell the nation’s strongest burst of inflation in 32 years.
The RBA on Tuesday lifted the cash rate by 25 basis points to 2.85%, the highest since early May 2013. The increase was in line with most economists’ expectations.
Markets had rated another rate rise as all but a certainty after the September consumer price index rose to 7.3%, higher than market forecasts.
“As is the case in most countries, inflation in Australia is too high,” the RBA governor, Philip Lowe, said.
“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8% later this year,” he said. “Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”
The RBA has now lifted its cash rate by 275 basis points since May, a rate of increase that matches the previous record spate during the second half of 1994.
Ahead of the release of its quarterly statement on monetary policy on Friday, the RBA also trimmed its GDP growth forecast to just 1.5% in 2023 and 2024, down from 1.75% predicted in August for both years.
“The board has increased interest rates materially since May,” Lowe said. “This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target. The board expects to increase interest rates further over the period ahead.”
Prior to today’s decision, projections by the four major banks had the RBA’s cash rate peaking at between 3.1% and 3.85%.
Australia was the first major country to reduce the pace of interest rate rises in October when the Reserve Bank went with a 25 basis point hike after four 50 basis point rises in a row. By contrast, the US Fed is expected to clock up four consecutive 75 basis point increases this week.
With the jobless rate hovering near half-century lows at 3.5%, the RBA will be watching closely what happens to salaries. The pricing behaviour of companies will also be a focus.
“Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in many other advanced economies,” Lowe said.
“A further pickup is expected due to the tight labour market and higher inflation.
“Given the importance of avoiding a prices-wages spiral, the board will continue to pay close attention to both the
evolution of labour costs and the pricesetting behaviour of firms in the period ahead.”
Market reaction to the decision was modest, with the Australian dollar giving up some of its gains for the day to 64.25 US cents. The stock market extended its advance, with the ASX 200 benchmark share index up about 1.7% for the day near its close. Banks such as the ANZ retained their forecast for how much higher the RBA would lift rates, leaving it at a predicted peak of 3.85% by next May. The CBA has stuck with its forecast of a “terminal” rate of 3.1% before it starts cutting by as much as 50 basis point by the end of 2023.
The head of Australian economics at CBA, Gareth Aird, noted the RBA expects the jobless rate to only rise gradually from 3.5% in October to “a little above 4% in 2024”, compared with last week’s federal budget forecast of 4.5% in mid-2024.
“The RBA want to keep the economy at full employment, which means they do not want the unemployment rate to rise much above 4%,” Aird said. “It is very much consistent with the notion of ‘keeping the economy on an even keel’.”
While Lowe did not mention energy prices as a propellent for inflation in his comments, the treasurer, Jim Chalmers, indicated the government was preparing a regulatory intervention to bring down costs for households and businesses.
Asked after the RBA decision whether he would back this week’s call by the Victorian premier, Daniel Andrews, for a domestic gas reservation, Chalmers said he welcomed input from state governments “when it comes to working out whether we can intervene in energy markets in a sensible and responsible and meaningful way”.
The Albanese government has foreshadowed action such as making the current voluntary code of conduct covering the gas sector mandatory.The treasurer said the government needed to move both urgently and carefully with any intervention because “there are a number of complex interactions here”.
He said energy was a significant component of the inflation challenge, so if there were steps that could be taken to “responsibly” deal with that, the government would act.
Earlier on Tuesday, Chalmers said in addition to a mandatory gas code, the government was looking to “include in that a consideration of price and not just supply”.