RBA Delivers Smaller Than Expected Rate Hike

Australia’s central bank raised its benchmark rate by a smaller-than-expected quarter point on Tuesday, after lifting rates by 50 basis points in each of the last four meetings.

The policy board of the Reserve Bank of Australia, headed by Governor Philip Lowe, decided to lift the cash rate target by 25 basis points to 2.60 percent from 2.35 percent. This was the highest rate since July 2013.

The RBA has been tightening its monetary policy since May. However, the pace of rate hike was slower than the expected 50 basis point.

The board also increased the interest rate on exchange settlement balances by 25 basis points to 2.50 percent.

The governor said the latest action will help to achieve its goal of bringing inflation back to the 2-3 percent target range and further increases in interest rates are likely to be required over the period ahead.

It is seeking to meet its aim while keeping the economy on an even keel, Lowe noted. The path to achieving this balance is a narrow one and it is clouded in uncertainty.

One source of uncertainty is the outlook for the global economy, which has deteriorated recently, he observed. Another is how household spending in Australia responds to the tighter financial conditions.

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 labor market, the governor added.

Capital Economics economist Marcel Thieliant said Australia’s consumers are still expected to hold up a bit better than most anticipate given the large buffers accumulated during the pandemic.

As such, interest rates will peak at 3.6 percent by early next year rather than the analyst consensus of 3.35 percent, the economist added.

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