RBA hikes cash rate target 0.5% to 1.35%, matching market predictions as the central bank battles inflation

The Reserve Bank of Australia (RBA) lifted the cash rate target by 0.5% to 1.35% on Tuesday, marking the third consecutive rate hike for a central bank desperate to dampen inflationary pressures.

In a statement issued after the RBA’s monthly board meeting, governor Philip Lowe said the hike was a necessary response to lingering inflation, a phenomenon exacerbated by the war in Ukraine, ongoing supply chain concerns linked to COVID-19, and broad demand for consumer goods across the economy.

“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role,” he said.

“Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices.

“The floods are also affecting some prices,” he added, reflecting on both the extraordinary flooding faced in March and the recent downfalls impacting large swathes of Sydney.

Inflation is expected to rise towards the end of the year and “moderate” when supply-side pressures ease, Lowe said.

Interest rates faced by borrowers are also set to climb thanks to the rising cash rate target, with lower demand expected as a result.

“Higher interest rates will also help establish a more sustainable balance between the demand for and the supply of goods and services,” Lowe said.

Those hikes will be keenly felt by small businesses across Australia, who not only face the prospect of higher borrowing costs, but the potential for household spending to fall in response to an economy-wide tightening of the belt.

Although higher-than-average household savings ratios persist, Lowe said the RBA “will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy”.

0.5% hike in line with Big Four banks’ predictions

Unlike June’s 0.5% rise, which was larger than some economists had predicted, Tuesday’s 50 basis point hike was forecast by Australia’s big four lenders.

The RBA board will have “considerable confidence from the high frequency data that a second “large” rate increase will not significantly damage the economy in the near term”, Westpac’s economic spokesperson Bill Evans said Friday.

Given the fact inflation is still hovering far above the RBA’s target band, there was a “further strong case for a third increase of 50 basis points” in July, he added.

A Thursday update from Commonwealth Bank posited a 0.5% rise as the “obvious” choice, stating, “it does not make sense to chop and change between a series of 25bp and 50bp hikes over coming months”.

ANZ took a similar tack, and an even earlier position from NAB predicted 0.5% hikes in both July and August.

Australian Macro Weekly: We look for the RBA to tighten by 50bp and signal more rate hikes to come. And we take a look at how very weak consumer confidence is often matched with weak discretionary spending. #ausecon #ausbiz @DavidPlank12 pic.twitter.com/5G4je04F29

— ANZ_Research (@ANZ_Research) July 1, 2022

Home loan interest rates surged in preparation for the hike. Commonwealth Bank last week lifted its fixed-rate mortgages by 1.4%, a major jump for the lender after years of suppressed rates through the COVID-19 pandemic.