Australia’s central bank raises benchmark rate for fourth month

Reserve Bank of Australia lifts cash rate by half a percentage point to 1.85 percent.

australia reserve bank
Australia's central bank has raised interest rates for a fourth month running [File: Greg Wood/AFP]

Australia’s central bank has raised its benchmark rate for a fourth month running, but tempered guidance on further hikes as it forecast faster inflation but also a slowdown in the economy.

The Reserve Bank of Australia (RBA) on Tuesday lifted its cash rate – the rate the central bank charges commercial banks for loans – by half a percentage point to 1.85 percent, marking an eye-watering 1.75 percentage point of hikes since May in the most drastic tightening since the early 1990s.

Yet, RBA Governor Philip Lowe also made the outlook for policy more conditional.

“The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” Lowe said.

That was taken as a dovish move by markets given Lowe had repeatedly stated the RBA Board wanted to get rates to a neutral level of at least 2.5 percent, where it theoretically would neither stimulate nor retard economic growth.

Lowe also updated the RBA’s economic forecasts, saying consumer price inflation was expected to peak at about 7.75 percent compared with 7 percent previously and 6.1 percent in the June quarter.

Inflation was not seen returning to the top of the RBA’s 2-3 percent target band until 2024.

Forecasts for economic growth were downgraded to 3.25 percent over 2022, and 1.75 percent in each of the following years. Previously the bank had forecast growth of 4.2 percent in 2022 and 2 percent in 2023.

Lowe had argued the economy could withstand the pain with unemployment at 48-year lows of 3.5 percent and job vacancies at all-time highs.

Yet, higher borrowing costs are proving a heavy drag on spending power given households owe 2 trillion Australian dollars ($1.4 trillion) in mortgage debt and home values are now in sharp retreat after a bumper 2021.

The hikes delivered so far will add approximately 560 Australian dollars ($389) a month in repayments to the average 620,000 Australian dollars ($431,120) mortgage, and that is on top of surging bills for energy and food.

Lowe has come in for some criticism over the rapid series of hikes with one local tabloid calling for him to quit his job.

Treasurer Jim Chalmers has defended the central bank’s independence, though he recently launched a review of policymaking and the Board to see if it needed modernising.

Source: Reuters

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