On 3 May 2022 the Reserve Bank announced that due to a stronger than expected rise in the inflation rate, measures were being undertaken to reduce inflationary pressure.
Put simply, monetary policy indicated a need to drive the current inflation rate from 5.1% down to somewhere between 2-3% to keep basic cost of living increases within manageable limits and the national economy stable.
In order to begin this process the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero percent to 25 basis points.
This translated into a cash rate of 0.34% and an exchange settlement balance interest rate of 0.25%.
On 7 May the Reserve Bank moved again - raising the cash rate to 0.85% and the exchange settlement balance interest rate to 0.75%.
If inflation continues to rise in the second half of this year it is possible that the Reserve Bank will increase the cash rate target to est. 1.25% by the end of December 2022. There is some speculation in business/financial media that the cash rate target might go as high as 2.5% sometime in 2023 before it begins to fall.
Commercial banks will likely be reassessing their lending rates in the coming weeks. The four big banks - Westpac, CBA, ANZ and NAB - have already responded with variable home loans increasing by 0.5%. That increase comes into effect from 17 June (CBA, ANZ, NAB) and 21 June 2022 (Westpac).
By way of example, this increase is likely to add around $115 per month on a $450,000 home loan where the homeowner is making a scheduled principal and interest payment.
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Reserve Bank of Australia
Media Release
Statement by Philip Lowe, Governor: Monetary Policy Decision
Number 2022-14
Date 7 June 2022
At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 85 basis points. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points.
Inflation in Australia has increased significantly. While inflation is lower than in most other advanced economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.
Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. 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. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate. Today's increase in interest rates will assist with the return of inflation to target over time.
The Australian economy is resilient, growing by 0.8 per cent in the March quarter and 3.3 per cent over the year. 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 terms of trade are at a record high.
The labour market is also strong. Employment has grown significantly and the unemployment rate is 3.9 per cent, which is the lowest rate in almost 50 years. Job vacancies and job ads are at high levels and a further decline in unemployment and underemployment is expected. The Bank's business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.
One source of uncertainty about the economic outlook is how household spending evolves, given the increasing pressure on Australian households' budgets from higher inflation. Interest rates are also increasing. Housing prices have declined in some markets over recent months but remain more than 25 per cent higher than prior to the pandemic, supporting household wealth and spending. The household saving rate also remains higher than it was before the pandemic and many households have built up large financial buffers. While the central scenario is for strong household consumption growth this year, the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy.
The Board will also be paying close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities. Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks withdraw monetary policy support in response to broad-based inflation. There are also ongoing uncertainties related to COVID, especially in China.
Today's increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed. Given the current inflation pressures in the economy, and the still very low level of interest rates, the Board decided to move by 50 basis points today. The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. [my yellow highlighting]
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