RBA tackles inflation with whopping rate hike

Speaking after the board meeting at its monetary policy meeting today (2 August), RBA governor Dr Phillip Lowe said the board made the decision to raise the interest rate by 50 bps in a bid to bring back inflation.

The RBA board’s decision comes as inflation hit 6.1 per cent at a time when domestic productivity has slowed, a tight labour market remains, global supply chain issues continue and unemployment rates remain low.

The move marks the governor's clear path back towards its target inflation range of 2 to 3 per cent, while keeping the economy on an “even keel”.

While the central bank indicated it was not on a “pre-set path”, Dr Lowe said further rate rises were expected over the coming months. 

“The size and timing of future interest rate increases will be guided by the incoming data and the board's assessment of the outlook for inflation and the labour market,” Dr Lowe said.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

It’s the first time the RBA has increased the cash rate in three consecutive 50-bp hikes, which themselves followed May's 25-bp rise. 

The last time the central bank lifted the cash rate more than 1.75 per cent in a four month period was in 1994, when the RBA lifted the cash rate twice by 1.0-bp (in October and December), after a 0.75-bp lift in August 1994.

The latest hikes take the cash rate away from its historic low of 0.1 per cent (November 2020 to April 2022).

Dr Lowe said inflation was expected to peak later this year before moderating back down, which reflected the ongoing resolution of global supply-side problems, the stabilisation of commodity prices and the impact of rising interest rates. 

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case," he said.

“The bank's central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024."

In making its decision, the RBA board reflected on the economy that is “expected to grow strongly this year".

“Employment is growing strongly, consumer spending has been resilient and an upswing in business investment is underway,” Dr Lowe said. 

The central bank’s forecast is for GDP growth of 3¼ per cent over 2022 and 1¾ per cent in each of the following two years.

While rising interest rates will help to slow demand in the economy, Dr Lowe had previously reiterated the importance of stronger productivity growth.

RBA analysis has shown average productivity growth had slowed over the past five years, to approximately 0.9 per cent as compared to 2 per cent growth during the 1990s and 1.2 per cent growth in the early 2000s.

With June’s unemployment hitting 3.5 per cent - the lowest rate in almost 50 years - Dr Lowe said a further decline was expected in the months ahead. 

“Beyond that, some increase in unemployment is expected as economic growth slows,” Mr Lowe said.

The bank’s forecast is for the unemployment rate to be around 4 per cent at the end of 2024. 

[Related: Boosting productivity will help steer inflation back]