RBA Raises Interest Rates Again

Australia is set for consecutive interest rate hikes

The official interest rate hike of 50-basis-point by the Reserve Bank (RBA) raises the cash rate to 1.35 per cent. with a rise of 125 basis points over the previous three months, it’s the highest level since June 2019.

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It seems that the easy monetary policy is no longer required because unemployment is at a 48-year low of under 4% and inflation is expected to reach a 32-year high of over 7%.

Simply put, the rate hikes mean that the RBA is bringing the cash rate closer to what is referred to be "neutral" levels of interest rates, or about 2.5 to 3 per cent.

Undoubtedly, the RBA needs to tighten monetary policy if the economy needs to experience some relief. This is an essential condition for inflation to finally return to the 2-3% target set by the Government and the RBA. It implies that the RBA must raise interest rates by an extra 125–150 basis points as soon as possible.

The interest rate hikes are all but guaranteed because the central bank is well behind the curve. 

The June quarter inflation numbers, which will be revealed on July 27, are expected to indicate a 2% increase in the quarter's CPI, bringing annual inflation to well over 6%, a 30-year high. This, along with a strong labour force released in the upcoming week, will ensure a further 50-basis-point increase when the RBA board meets in early August.

The recent hike in interest rates is an additional step in the process of eliminating the extraordinary financial support that was put in place to protect the Australian economy from the worst consequences of the pandemic. 

The new interest rate increase will undoubtedly make the banks pass it forward to variable mortgages and business loans. Independently, higher interest rates alone will cool the housing market down a bit.

Due to the strength of the labour market, the interaction of a slower supply due to a decline in construction, and a stronger demand due to an increase in immigration, it is still likely that Australia-wide house prices will decline by about 7% from peak to trough with further, more extreme falls.

Notably, even though the house prices are slightly lower in Sydney and Melbourne and remain unchanged in Hobart, the prices are still rising in Perth, Adelaide, Darwin, Canberra, and Brisbane.

A strong labour market, a very tight rental market that draws the investors, and the moderate expansion in supply relative to demand, the latter of which is supported by a comeback in international migration, are the causes of this extremely soft landing for housing.

In any case, the RBA does not give much thought to housing prices. Although it will check to see if any more widespread wealth loss is having an influence on household wealth and spending, its main focus will be on inflation and the labour market.

The signs of a sharp fall in global commodity prices are actually good news for inflation and estimate where interest rates will peak.

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Oil, lumber, metals, energy, and agricultural products have all seen a price decline of 10 to 20 per cent in the past month. There might be delays but this will more likely affect consumer prices.

According to the present circumstances, the yearly inflation is predicted to reach a peak of roughly 7% in the December quarter of 2022 and then rapidly decelerate into 2023.

Several factors will influence how quickly inflation slows. The RBA's rate increases will be quite important, but the consequences of the commodity price declines being passed on to other markets will also be very significant.

By the end of 2023, inflation is probably going to be close to the 2 to 3 per cent target, but that prediction depends on commodity prices continuing to fall and the RBA raising the cash rate to 2.5 to 3 per cent in the coming months.

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