RBA Monetary Policy Meeting 5th July

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The increase of 50 basis points up to 1.35% was not unexpected by economists in the lead-up to the meeting, as many other major world economies have also been attempting to get control of runaway inflation in the same way, by tightening their monetary policy. The RBA additionally increased the interest rate on Exchange Settlement balances by 50 basis points to 1.25%.

In its official statement following the meeting, the Board cited global and local inflation, covid-related disruptions to supply chains, the ongoing conflict in Ukraine, flooding in the eastern states of the country, and high demand as putting pressure on productive capacity and adding downward risks on growth.

The RBA is accelerating the process of normalizing its monetary policy like other central banks around the world

The Board’s Governor, Philip Lowe, warned a few weeks ago on Australia’s ABC 7:30 news program that interest rates were still far too low for a country with such low unemployment figures, and since the pandemic had essentially come to an end, the emergency measures that were in place previously were no longer needed.

He reiterated this sentiment in today’s meeting’s statement, saying: “The resilience of the economy and the higher inflation means that this extraordinary support is no longer needed. The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead.”

Lowe further commented in his previous interview that he expected inflation to rise from its current 5% up to 7% by the end of the year. A high number obviously, but not as extreme as some countries in Europe or in the US, where inflation is hovering around 8.6%.

The European Central Bank (ECB) has forecasted a rise of 25 basis points at the upcoming July meeting, while the Federal Reserve (Fed) increased its Fed Funds rates by 75 basis points just a couple of weeks ago, to a range of 1.5%-1.75%.

Closer to Australia, New Zealand’s OCR increased to 2% already back in May, and some are forecasting that it will continue to climb to 4% by next year and continue at that level until around 2024.

Further OCR rate hikes should be expected

For Australian homeowners, the pain of their rising mortgage payments will probably continue for a while yet, as the RBA has pledged to get inflation back down to a more manageable 2-3% by next year (2023).

It’s expected that global supply issues will continue to ease, and the price of commodities will stabilize during this time and help moderate inflationary conditions. The RBA Board advised that the updated forecasts for inflation would be published in August following the release of the June quarter CPI.

When asked about the possibility that the country is staring down the barrel of recession, Lowe said in the same interview “It doesn’t feel like the precursor to a recession, and interest rates, while they have gone up, they’re still low. The cash rate is still less than 1% at a time when the unemployment rate is at a 50-year low. Australians need to be prepared for higher interest rates.”

The cash rate as a result is expected to reach around 2.5% at the end of 2022, up from its lowest level of .10% held from November 2020 to April 2022.

As painful as it may be for mortgage owners that have potentially over-extended themselves during the last couple of years, it’s probably worth zooming out a little and remembering that the OCR was as high as 17% back in 1990, and more recently in 2008 the OCR reached as high as 7.25% during the global financial crisis.

Nobody can rule out whether rates in the future will reach those lofty heights again, but it’s fair to say that things certainly aren’t as dire as they were in years past, and it may not be the time to panic just yet.

Is the Australian economy going to keep being resilient with higher interest rates?

The monetary policy statement also pointed to the resilience of the Australian economy, and that the unemployment rate was still at a steady 3.9% in May, which is the lowest it has been in nearly 50 years.

The figures for underemployment have also fallen quite significantly, with new job ads and vacancies at very high levels, suggesting that the labor market is extremely competitive at present.

One cause for uncertainty was in regards to individual household spending. Homeowners are under ongoing pressure from higher inflation, and now increasing mortgage payments could decrease the amount of household consumption, which accounts for over 50% of the Australian economy. If housing prices also start to fall as some economists have predicted by up to 15% to 20%, then many will feel much less optimism surrounding their financial positions.

Petrol prices are also on the rise across the country, and in the height of winter, electricity and gas prices continue towards an uncertain peak, due to pressures on capacity.

What to expect next?

At the close of the statement, the Governor concluded “The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation in the labor market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Once again this month, many Australians will be looking at their household budgets, and adjusting them, while the “big four banks” in Australia, the CBA, ANZ, NAB, and Westpac have not officially responded to the announcements today, they’re tipped to pass on the rate increase in the coming days and weeks, as they have previously.