Governor of the Reserve Bank of Australia (RBA), Philip Lowe, has announced that the cash rate target has been increased by 50 basis points to 1.85%. This is the fourth consecutive month in which the cash rate has been increased. In June and July, the rate was similarly increased by 50 basis points, meaning a cumulative increase of 1.5% has taken place over the last three months.
Lowe also confirmed that the interest rate on Exchange Settlement balances would also be increased by 50 basis points, bringing it to 1.75%. Anneke Thompson of CreditorWatch said that the interest rate hike was driven by July’s employment data that indicated the unemployment rate had fallen to 3.5%. This represented an increase of over 600,000 Australians having become employed since March 2020.
Lowe termed the increase in interest rates as a step towards the normalisation of the monetary conditions in the country. He confirmed that the hikes were an attempt to reign in inflation back to target and create a more sustainable balance of demand and supply in the economy. He said that the RBA board expected to continue making similar steps in the coming months, with the sizing and timing of further increases being guided by incoming data and their assessment of inflation and the labour market.
The RBA noted that on a global scale, economic growth was reduced due to the impact on real incomes by higher inflation, tightening monetary policies in various countries, the Russia-Ukraine war and ongoing COVID containment measures in China. At a domestic level, inflation was also worsening due to the effects of floods, rising demand, a tight labour market, and capacity limitations in some industries.
With the CPI having reached a high of 6.1% in June, the RBA is expecting inflation to peak at 7.75% by the end of this year and decline to over 4% in 2023 and drop to about 3% in 2024. GDP is also expected to grow by 3.25% this year, and slow down to 1.75% in the subsequent two years.
In response to the interest rate hikes, several big banks have confirmed they will be passing on the cost to borrowers. The Commonwealth Bank, ANZ, and Westpac have announced they will pass on the full 0.5% interest rate rise, impacting most new and existing borrowers. CBA has said that term deposits will also begin accruing higher returns from August 8, as will Westpac’s savers, as two options receive a 0.5% hike.
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