The Reserve Bank of Australia (RBA) has announced another 50 basis points (bps) rate hike, taking the official interest rate to 2.35 per cent.
With inflation now predicted to surpass 7 per cent by the end of the year, the RBA said on Tuesday its latest decision is yet another step toward normalising monetary conditions in Australia.
"The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy," the RBA Governor said.
While the central bank earlier confirmed it is not on a pre-set path, economists widely agreed that the bank would announce a fourth 50 bp lift in a row in a show of determination to return inflation to target.
Last month, the RBA said returning inflation to between 2 and 3 per cent would be its key focus for this financial year.
And, with the annual rate of inflation on an upswing towards a peak of 7.75 per cent in December, alongside a very tight labour market, the RBA has a free hand to do everything it can to contain inflation. But the inflation fight is expected to be long and painful given that the RBA doesn't expect the target range to be in sight until December 2024.
As such, Scott Solomon, associate portfolio manager of T. Rowe Price’s dynamic global bond strategy, described Tuesday's decision as “relatively straightforward”.
He explained that while inflation engines, such as wages and retail demand, continue to surprise on the upside, other areas, such as home prices, haven’t fallen enough to raise red flags.
Mr Solomon expects the bank to hike by another 50 bps in October, noting that “absent some sort of unexpected shock”, “there simply won’t be enough data releases between now then for the RBA to change course”.
Anneke Thompson, chief economist at CreditorWatch, agreed that the RBA will not hit the pause button on cash rate increases until retail trade data starts to better reflect downbeat consumer sentiment. This, she said, could happen as soon as the upcoming Christmas shopping period. But she flagged several risks to this prediction.
"It is likely by December that mortgage holders will be really feeling the effects of higher repayments, and of course higher prices of everything from furniture, to eating out and to holidays. However, increasing the complexity for the RBA is the record low unemployment rate," Ms Thompson said.
“The question is, ‘Will consumers be spooked enough by their savings falling to reduce their spending, even when job security is so high?’ Retail spending data, coupled with the now exceedingly important anecdotal data from the major retailers, will give us further insight over the next few months leading into Christmas,” she added.
AMP’s chief economist, Shane Oliver, believes there is already a strong case for the RBA to slow the pace of tightening. However, Dr Oliver has admitted that “given the ongoing strength in jobs and spending data there is an increasing risk that the RBA will tighten beyond this”.
Economists are united in expecting Governor Philip Lowe to deliver hints at further rate hikes during a speech on the economy and monetary policy at the Anika Foundation in Sydney on Thursday.
While ANZ is forecasting another 50 basis point hike in October, CBA, NAB and Westpac are expecting Tuesday to be the last major lift.
IFA