As of the RBA meeting on October 4th, the Board has decided to increase the cash rate to 2.60 percent, representing a 25 basis point rise in the cash rate.
Why is the cash rate still rising?
The RBA Board has once again stressed the importance of returning the inflation rate to the 2-3% target over a period of time. For this reason the Board believes further rate rises will be necessary.
However, the most recent rate rise was 25 basis points, down from the 50 basis point rises we have seen recently. The RBA has done this to allow time to ‘assess the outlook for inflation and economic growth in Australia’.
RBA Board’s Opinion on Economic Outlook
The current inflation rate in Australia is much too high. While global factors play a major role and this is evident in global inflation rates, domestic demand relative to supply is also an important factor.
Economists believe that inflation will continue to increase in the short-term (next couple of months), before inflation begins to recede towards the 2-3 percent range. The RBA has forecasted inflation to be 7.75% over 2022, 4% over 2023, and 3% in 2024.
The Australian economy is still growing quickly boosted by a record level of terms of trade. The tightness in the labour market has led to an unemployment rate of 3.5%, and a difficulty for firms to find employees.
Wages growth is beginning to increase, although it is still lower than in other advanced economies with higher inflation. Due to the tight labour market, it is still expected that wages will begin to increase.
The RBA Board has noted the pressure on household budgets. This pressure is caused by higher inflation and higher interest rates. House prices have begun to decrease and worryingly the full effect of higher interest rates has not yet been felt by many borrowers.
Link to RBA Statement: Here
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