Third Consecutive Increase to Interest Rates
At its meeting today, the Board of the Reserve Bank increased the cash rate by 50 basis points to 1.35 per cent.
Factors Affecting their Decision
Global inflation is high: It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity. Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries.
Local Inflation: Inflation in Australia is also high. This is primarily due to global factors and domestic factors. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.
Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range next year. Inflation is expected to improve as global supply-side constraints begin to ease and commodity prices stabilise. Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services.
The Australian Economy: The Australian Economy remains resilient. The unemployment rate is steady at 3.9 per cent, the lowest rate in almost 50 years. Underemployment has also fallen significantly. Job vacancies and job ads are both at very high levels and a further decline in unemployment and underemployment is expected over the months ahead.
Consumer sentiment is at an all time low with rising interest rates, fuel prices, power prices and generally cost of living pressures. One source of ongoing uncertainty about the economic outlook is the behaviour of household spending. Household savings remain at higher levels than it was before the pandemic and many households are ahead in their mortgages and are benefiting from stronger income growth.
Phillip Lowe the Governor of the Reserve Bank of Australia said, "Today's increase in interest rates is a further step in the withdrawal of the extraordinary monetary support that was put in place to help insure the Australian economy against the worst possible effects of the pandemic."