The Reserve Bank of Australia (RBA) has announced that interest rates are to increase by a further 0.25% bringing the official cash rate to 3.35% and made clear there will be further hikes in the near term.
This is the ninth successive rate hike, and the Bank also warned that the cost of borrowing will continue to rise.
In a statement Phillip Lowe, the Governor of the RBA, said that high inflation in Australia was the main motivation to raise rates yet again.
Over the year to the December quarter of 2022 the CPI had jumped upwards to 7.8%, the highest inflation recorded in Australia for 32 years.
Lowe said that the price issue reflected the inflation problem around the world.
Yet he expects prices to fall over the course of this year, due to lower energy prices, and the solutions to global supply chain issues that have arisen since the Covid-19 pandemic. As central banks across the world have highlighted monetary policy tightening to reduce inflation, the cumulative rate rises globally should have a dampening effect on rising prices.
The RBA forecasted a decline in inflation to 4% this year, and then further fall to 3% by midway through 2025.
As the priority of the RBA is to bring inflation down to its 2% to 3% target, Governor Lowe was in no doubt that he expects more rate increases throughout this year.
Yet Lowe also stressed that high inflation is only a temporary situation in influencing how far interest rates need to increase.
So far, the yield on Australia’s two-year government bonds has risen since the rate announcement was made, rising to 3.287% from 3.167% before the RBA’s statement.
No Surprises for Analysts
Most analysts and traders anticipated that there would be a 0.25% rate rise, so they were not taken aback by the RBA’s latest move.
The forecasts of just how far that the rate rises will go vary, but the consensus expects hikes of 0.25% in March and April respectively, as headlined by the Commonwealth Bank, Australia’s largest bank.
Analysts at the National Australia Bank have predicted that interest rates will reach a climax at a lower terminal rate of 3.6% by March this year, before remaining stable and then falling to 3.1% in March 2024.
There is also an ongoing debate whether rate rises will eventually push Australia into a recession. A Deloitte Access Economist Business Outlook report predicted that one more interest rate rise could result in recession. Ratings agency Moody’s see a one-in-three chance of a recession in 2023.
Economic Growth Remains Strong
Governor Lowe said that growth in Australia throughout 2022 was strong, and even though growth is expected to slow to around 1.5% this year and in 2024, a full-on recession should be avoided.
Overall, the recovery in spending on services following the lifting of Covid-19 restrictions has now largely run its course, and the tighter financial conditions will constrain spending.
The labour market is set to remain tight.
The unemployment rate is at its lowest since 1974 and has been steady at about 3.5%.
Australian Dollar and Stock Market Both Fall
Unsurprisingly, the S&P/ASX 200 fell after it was known that interest rates had increased again.
It was pegged at 7,548 just before the rate statement was due, then it continued dropping firmly throughout the day.
The Australian Dollar initially rallied following the release, on the expectation of higher rates. While that expectation has not changed throughout the day, the Aussie gave up almost all its gains of the day by the time New York opened for trading, suggesting that the Australian Dollar will not get much of a lasting boosting from today’s release.