07/06/2022
Aussie against the US Dollar is back at almost the same level as before the announcement
Inflation in Australia in these couple of years has increased significantly. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine as well as domestic factors, with capacity constraints in some sectors and the tight labor market, contributed to the upward pressure on prices. Due to this, the Reserve Bank of Australia Board on 7th June 2022, that is today, decided to increase the cash rate target by 50 basis points to 85 basis points. The Board also increased the interest rate on Exchange Settlement balances by 50 basis points to 75 basis points. An 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 means that this extraordinary support is no longer needed.
According to the Board, inflation is likely to be higher than a month ago due to higher prices for electricity and gas and recent increases in petrol prices but then decline back towards the 2-3 percent range next year. Once the global supply-side problems are resolved and commodity prices stabilize, inflation is expected to be moderate. Thus, the Board thought an increase in interest rates will assist with the return of inflation to target over time.
Philip Lowe, the Governor, further says the Australian economy is resilient, growing by 0.8 percent in the March quarter and 3.3 percent over the year. Household and business balance sheets are generally in decent 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 labor market is also strong. Employment has grown significantly, and the unemployment rate is 3.9 percent, which is the lowest rate in almost 50 years. Job vacancies and job ads are at elevated levels and a further decline in unemployment and underemployment is expected.
The Governor further adds, that 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 percent 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.
The Board will be having a close look at these various influences on consumption as it assesses the appropriate setting of monetary policy. The Board will also be paying attention to the global scenario as it still remains clouded by the war in Ukraine and its effect on the prices of energy and agricultural commodities. Lastly, Philip Lowe mentioned that the Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead and the Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.
