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On June 7, the Reserve Bank of Australia’s cash rate was increased by 50 basis points (bps) to 0.85%, much higher than anticipated, to restrain surging inflation. This hike has been the biggest in 22 years by the central bank.
Central banks across the globe are grappling with high inflation due to disruption in the supply of goods and energy amid the lockdowns in China and Ukraine-Russia war. Australia has now joined more than 50 other monetary authorities, including the US Federal Reserve, in raising central bank interest rates by at least a half-point in a single move in 2022.
The current outsized hike has sent Australian three-year yields up as much as 19 basis points to 3.16% and 10-year yields have climbed up to 7 basis points higher to 3.55%. Australia’s benchmark share index extended its decline to as much as 1.5%.
Upcoming Australia cash rate hikes
Jo Masters, the chief economist at Barrenjoey Markets, told Bloomberg that she expects another 100-basis-point increase in 2022, followed by one or two increases in 2023. Gareth Aird, head of Australian Economics at Commonwealth Bank of Australia (CBA), says, “There has been a clear shift in tone and stance from the board,” predicting a cash rate of 2.1% by the end of 2022.
The Australian economy grew by 0.8% in the March quarter and 3.3% over 2022. Reserve Bank of Australia Governor Philip Lowe said that his team expects to take further steps in normalizing monetary conditions in Australia over the next few months. Lowe adds, “Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected.”
Lowe said that inflation is expected to increase further, but then decline back towards the 2% to 3% range in 2023. Higher prices for electricity and gas and recent increases in petrol prices mean, that in the near term, inflation is likely to be higher than was expected a month ago. Australia’s inflation target is to keep annual consumer price inflation at 2% to 3%, on average, over time. This considers price changes for the goods and services that households buy.
This is the first rate hike under the new Prime Minister Anthony Albanese and may also add to the economic challenges faced by his Labor party government. The hike will also be a test of consumer sentiment, which has been steadily sliding on concerns of higher mortgage repayments that will further weigh on heavily indebted households.
Household and business balance sheets are generally in good shape. An upswing in business investment is underway, and there is a large pipeline of construction work to be completed. Macroeconomic policy settings are supportive of growth, and national income is being boosted by higher commodity prices.
The Australian dollar initially jumped as high as 0.7245 against the US dollar on the announcement, but quickly swung to a loss at 0.7198 as bets for further gains were liquidated amid a broader shift in currency and equity markets away from risk-sensitive assets.
