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Australia’s central bank raised interest rates by a half-point for the first time in a row and promised to keep tightening monetary policy to stop inflation from getting worse.
The Reserve Bank of Australia increased the cash rate to 1.35 percent, the highest level since May of this year.All but one of the 26 economists polled by Bloomberg saw this coming.
The RBA raised interest rates for the third time in as many months on Tuesday. This is in line with what other countries are doing to stop inflation from getting out of hand. The Australian dollar went from making a small gain to making a small loss. At 2:39 p.m. in Sydney, it was trading down 0.1% at 68.59 US cents. Gains were cut down by bond yields.
In a statement after the meeting, RBA Governor Philip Lowe said, “The board expects to take more steps in the coming months to normalise Australia’s monetary conditions.” “The board is committed to doing whatever it takes to make sure that Australia’s inflation goes back to where it should be over time.”
Since May, the RBA has raised borrowing costs by 125 basis points, which puts more pressure on consumers who already have a lot of debt. Lowe has said that the benchmark rate could go up to 2.5%, while money market pricing points to a peak of 3.2% this year. This makes people worry that the economy could fall into a recession.
So far, spending has been strong, and recent data on credit card spending from Australia’s biggest banks suggests that June will be another good month for sales. Also, the number of open jobs is at an all-time high, which suggests that unemployment, which is already close to its lowest level in almost 50 years, will go down even more.
Still, interest rates are going up at a time when the cost of living is going up for Australian households, whose debt-to-income ratio has reached a record high of 187%.
The RBA said in a statement that recent spending data has been good, but higher prices and higher interest rates are putting pressure on household budgets. “When deciding how to set monetary policy, the Board will pay close attention to these different factors that affect how much people spend.”
The most recent data on home loans, which came out on Monday, showed that mortgage commitments went up by 1.7% in May. Both loans to owner-occupants and loans to investors went up.
In the past few weeks, economists have been rushing to lower their predictions for growth in the Australian $2.1 trillion economy. For example, Nomura Holdings (NYSE:NMR) Inc. predicted that the economy would go into a recession.
Also, Australia’s populated eastern seaboard has been hit by heavy rain and flooding for most of this year. This has pushed up food prices at the same time that electricity and gas prices are going up.
“Today’s increase in interest rates is another step toward ending the extraordinary monetary support that was put in place to protect the Australian economy from the worst possible effects of the pandemic,” Lowe said in the statement. “This extra help is no longer needed because the economy is doing well and inflation is going up.”
(This adds Lowe’s comments all over.)
Bloomberg L.P. 2022
