As many experts had predicted, the RBA board has decided to increase the cash rate by 50 basis points to 1.35%. The cash rate has now increased from 0.1% in April to 1.35% in July. This comes as most major economies continue to struggle with inflation.
What is expected in the coming months?
The main goal of monetary policy is to keep inflation at 2-3%. Interest rate policy during COVID was highly stimulatory at 0.1%, in order to keep spending higher and prevent a recession. The RBA is looking to move toward a neutral interest rate, as inflation has increased over the previous quarters.
The RBA’s opinion on the neutral rate is critical to understanding where interest rates may go. The RBA has previously mentioned a number around 2% would be neutral, however this will be affected by the changing market conditions after these statements. Given interest rates are currently 1.35% they would still be considered stimulatory.
Most analysts expect inflation to still be quite high for the June quarter and this would be followed up by another 0.5% rate rise in August. If the analysts are correct regarding the next rate rise, the interest rates would then be 1.85%. Considering how fast rates have risen since April and the fact that we are approaching what the RBA believes to be the neutral rate, interest rate rises will likely begin to cool off later this year. This all depends on the quarterly reports on inflation and the labour market, as we will see interest rate rises slow after low inflation data.
For more information refer to the RBA meeting notes: RBA Meeting Statement
Source: Westpac
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