RBA announces another super-sized cash rate increase

The Reserve Bank of Australia (RBA) has announced another 50-basis-point (bp) 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.

“Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead. Global factors explain much of the increase in inflation, but domestic factors are also playing a role,” Philip Lowe said on Tuesday. 

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 RBA doesn't expect the target range to be in sight until December 2024, signalling a long and painful inflation fight. 

“The bank's central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024,” the Governor confirmed. 

‘Relatively straightforward’ decision

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 bp 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.

When will the RBA slow pace of tightening?

AMP’s chief economist, Shane Oliver, believes there is already a strong case for the RBA to slow the pace of tightening. However, he revealed on Tuesday that AMP has now revised its assessment for the cash rate peak from 2.6 per cent to 2.85 per cent, with 0.25 per cent hikes pencilled in for October and December.

“Market expectations for the cash rate to peak around 3.8 per cent in the September quarter next year look too hawkish and if realised would likely plunge the economy into recession and push home prices down by 30 per cent or so from their highs earlier this year,” Dr Oliver explained.  

And while ANZ is forecasting another 50-bp hike in October, CBA, NAB and Westpac are expecting Tuesday to be the last major hike. 

Similarly, Steven Spearing from Apostle Funds Management believes the RBA will now move to a more gradual and watchful phase of this rate hike cycle.

“The Reserve Bank will surely look to pause in the near future to allow the impact of recent rate hikes to flow through to the economy in order to assess what further tightening is appropriate,” Mr Spearing said.

“This would likely mean a 25-basis-point hike at their next meeting in October and incoming data over the coming months, particularly around inflation and the labour market, will determine the extent of future rate hikes beyond that.”

Apostle does, however, expect the RBA to take the cash rate to close to 3 per cent before it feels comfortable that financial conditions are adequately restrictive in the face of a resilient local economy.

Economists expect Governor 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.