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The low unemployment rate forced the bank’s hand, says CreditorWatch economist.
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RBA raises rates for a fourth month in a row
03 August 2022
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10 minute read
The RBA has lifted the cash rate by 50 bps to 1.85 per cent, the fourth consecutive monthly increase.
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The rate rise matches those in June and July, resulting in an increase of 1.5 per cent over the past three months.
CreditorWatch chief economist Anneke Thompson said that the RBA had to move after the unemployment rate fell to a record low in July.
“Contributing to the decision was July’s employment data which saw the unemployment rate drop to 3.5 per cent,” said Ms Thompson. “There are now 600,000 more Australians employed than there were in March 2020 – an extraordinary increase.”
The RBA acknowledged the jobless figure was a key factor in its decision but it expects the unemployment rate to lift to around 4 per cent by the end of 2024.
The RBA said its rate rises were normalising monetary conditions in Australia and needed to bring inflation back on target while creating a more sustainable balance of supply and demand.
Hitting its 2–3 per cent inflation target was a priority after a CPI figure of 6.1 per cent in the June quarter, the highest since the early 1990s.
The board said the timing and size of further rate rises would be guided by data and the health of the economy.
The bank forecasted inflation to peak at the end of this year at 7.75 per cent and then decline to a little above 4 per cent over 2023 and around 3 per cent throughout 2024.
It expected the economy to grow strongly this year, with a GDP increase of 3.25 per cent, before the pace slows to 1.75 per cent in each of the following two years.
“Employment is growing strongly, consumer spending has been resilient and an upswing in business investment is underway,” the bank said.
“National income is also being boosted by a rise in the terms of trade, which are at a record high.”
CPA Australia’s senior manager tax policy, Elinor Kasapidis, said that another increase in rates meant businesses needed to be attentive to their cash flow management.
“In this new environment of rising rates businesses should consider reviewing their supply chains and paying special attention to expense management and cash flow,” said Ms Kasapidis.
“The reserve bank will monitor the situation and while we hope we won’t have the interest rates of the 1980s it is important spending is reined in enough to handle inflation.”
The RBA also announced that it would be increasing the interest rate on exchange settlement balances by 50 bps to 1.75 per cent.
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