RBA increases cash rate for sixth consecutive month – but it’s not as bad as expected
The increase marks the sixth consecutive hike since May
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The Reserve Bank of Australia has raised the cash rate by 25 basis points, less than the predicted 50 basis points most financial institutions were bracing themselves for.
This brings the cash rate up to 2.60 percent, marking the sixth consecutive increase since May.
In a statement just released by RBA Governor Philip Lowe, he said the RBA board is committed to driving inflation down towards 2 or 3 percent over time.
“Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead,” Lowe said. “The cash rate has been increased substantially in a short period of time. Reflecting this, the Board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia.”
Most analysts predict that November will also most likely see a further increase by 25 basis points, which Lowe flagged in his statement.
“Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down,” he said. “The Board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour.
“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Lowe has faced mounting criticism this year following repeated statements in 2021 that interest rates were unlikely to rise until 2024.
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Excluding the Covid-19 pandemic period, annual growth was the lowest since 1992
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Australia’s commodity-rich economy recorded its weakest growth momentum since the early 1990s in the second quarter, as consumers and businesses continued to feel the impact of high interest rates, with little expectation of a reprieve from the Reserve Bank of Australia in the near term.
The economy grew 0.2% in the second quarter from the first, with annual growth running at 1.0%, the Australian Bureau of Statistics said Wednesday. The results were in line with market expectations.
It was the 11th consecutive quarter of growth, although the economy slowed sharply over the year to June 30, the ABS said.
Excluding the Covid-19 pandemic period, annual growth was the lowest since 1992, the year that included a gradual recovery from a recession in 1991.
The economy remained in a deep per capita recession, with gross domestic product per capita falling 0.4% from the previous quarter, a sixth consecutive quarterly fall, the ABS said.
A big area of weakness in the economy was household spending, which fell 0.2% from the first quarter, detracting 0.1 percentage point from GDP growth.
On a yearly basis, consumption growth came in at just 0.5% in the second quarter, well below the 1.1% figure the RBA had expected, and was broad-based.
The soft growth report comes as the RBA continues to warn that inflation remains stubbornly high, ruling out near-term interest-rate cuts.
RBA Gov. Michele Bullock said last month that near-term rate cuts aren’t being considered.
Money markets have priced in a cut at the end of this year, while most economists expect that the RBA will stand pat until early 2025.
Treasurer Jim Chalmers has warned this week that high interest rates are “smashing the economy.”
Still, with income tax cuts delivered at the start of July, there are some expectations that consumers will be in a better position to spend in the third quarter, reviving the economy to some degree.
“Output has now grown at 0.2% for three consecutive quarters now. That leaves little doubt that the economy is growing well below potential,” said Abhijit Surya, economist at Capital Economics.
“But if activity does continue to disappoint, the RBA could well cut interest rates sooner,” Surya added.
Government spending rose 1.4% over the quarter, due in part to strength in social-benefits programs for health services, the ABS said.
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