In a decisive move to combat persistent high inflation, the Reserve Bank of Australia (RBA) has announced an increase in the cash rate target by 25 basis points, bringing it to 4.35 per cent.
This is in alignment with the adjustment of the interest rate on Exchange Settlement balances which also saw an uptick of 25 basis points to 4.25 percent.
Provided banks pass the increase on to borrowers, the cash rate hike will add an extra $84 to monthly repayments for a $500,000 loan over 30 years
This recent monetary tightening follows a period of stability since June, with the RBA keeping the interest rates unchanged to evaluate the impact of previous hikes. However, with the inflation rates proving more stubborn than anticipated and the risk of a prolonged high-inflation environment increasing, the Board has resolved to take further action.
And more tightening may still be needed, RBA governor Michele Bullock specified.
“Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks,”Ms Bullock said in a post-meeting statement.
The most recent Consumer Price Index (CPI) data indicate that, while the rise in goods prices has moderated, the cost of services is advancing significantly.
The RBA now forecasts CPI inflation to ease to around 3.5 per cent by the end of 2024, finally reaching the upper edge of the 2 to 3 per cent target range by the end of 2025.
The Board’s decision comes after considering the latest data on inflation and the labor market, as well as the revised set of economic forecasts. The Australian economy has exhibited stronger-than-expected growth during the first half of the year, though now projected to experience below-trend expansion.
Despite the cooling of the labor market, conditions remain tight, and housing prices are on an upward trajectory nationwide.
Conversely, high inflation impacts real incomes, causing household spending to soften and a slump in dwelling investments. With the economic growth expected to slow down, the job market is likely to expand at a lesser rate, leading to a gradual uptick in the unemployment rate to about 4.25 per cent – a more moderate increase than previously anticipated.
The Board underscores the urgency of returning inflation to the target range, emphasizing the widespread challenges high inflation presents to the economy. It stresses that entrenched inflation expectations could lead to even harsher measures in the future, including more drastic interest rate hikes and a significant increase in unemployment rates.
Uncertainty remains a key concern for the Board, with the persistence of service price inflation and the unpredictability of the global economic situation, including China’s economic outlook and international conflicts.
Moving forward, the RBA asserts that further monetary policy tightening will be guided by incoming data and risk assessment, with a steadfast commitment to bringing inflation back to its target range. The Board will maintain a close watch on global economic developments, domestic demand trends, and the overall outlook for inflation and the labor market in its resolve to stabilise the economy.
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