Australia’s central bank raises interest rates for the third time in a row, with more to come.
Sydney (Reuters) -Australia’s central bank raised interest rates for the third month in a row on Tuesday and said there would be more to come as it tries to stop rising inflation, even if it means causing the economy to slow down.
At the end of its July policy meeting, the Reserve Bank of Australia (RBA) raised its cash rate by 50 basis points to 1.35%. This was the 125th basis point increase since May and the fastest series of moves since 1994.
In a statement, RBA Governor Philip Lowe said, “The Board expects to take more steps in the coming months to normalise Australia’s monetary conditions.”
The market expected the rate to go up, and the local dollar went down a little after $0.6863, while the odds of another half-point hike in August went down.
Lowe was sure that the economy could handle the shock because unemployment was at a 50-year low of 3.9% and job openings were at an all-time high. Demand from households has also been strong, in part because A$260 billion ($178.59 billion) was saved during the pandemic lockdowns.
Still, higher borrowing costs will make it harder for people to spend because they already owe money. Following a strong year in 2021, mortgage debt and home values have begun to fall by $2 trillion.
So far, the price increases have added about A$400 a month to the average AU $620,000 mortgage payment. This is on top of the higher costs for energy, gas, health care, and food.
Rates are expected to rise, and they are expected to be painful.
The recent flooding on the East Coast will make things worse by driving up the prices of fruits and vegetables.
Official data on consumer price inflation for the second quarter will be released later this month. It is expected to show another alarming rise to 6 percent or more, which hasn’t happened since a national sales tax was put in place in 2000.
The RBA’s goal range of 2% to 4% is also likely to rise above 4% and move further away from the RBA’s goal range of 2% to 4%.
This is a big reason why the markets think rates will go up by another half-point in August and reach at least 3% by the end of the year.
Lowe recently said that there was a “narrow path” between tightening enough to keep inflation under control and tightening too much and sending the economy into a recession.
Andrew Ticehurst, an economist at Nomura, said, “It seems willing to risk some economic damage to reach its inflation goal.” “We think that this pain will come true, and we now think that Australia will go into a recession early next year.
“Because inflation isn’t falling as fast as we’d like, we think rate cuts will be pushed back a bit, but we’ve planned for three 25bp cuts by the end of next year.”
In Australia, $1 equals $1.4558.
