Reserve Bank raises cash rate for a fourth straight month

The Reserve Bank of Australia has lifted the cash rate by another 50 basis points in August, the third double-sized hike in a row, and fourth increase since May.

The cash rate has risen sharply from its historic low of 0.1% to 1.85% since May. However, economists say the tone of the RBA governor’s statement may signal the pace of rate hikes could soon slow.

The official cash rate has risen from 0.1% to 1.85% since May. Picture: Getty

In handing down the decision, RBA governor Philip Lowe said the board remained committed to getting inflation back within its 2-3% target range.

“Inflation in Australia is the highest it has been since the early 1990s,” Mr Lowe said. “The board places a high priority on the return of inflation to the 2–3% range over time, while keeping the economy on an even keel.”

“The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.”

The 50 basis point increase to the cash rate was widely anticipated by economists, with recent inflation data showing the Consumer Price Index (CPI) jumped to 6.1% over the year to June.

Releasing upgraded economic forecasts, Mr Lowe said inflation was now expected to peak at 7.75% later this year – well above the RBA’s 2-3% inflation target.

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 1.85 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 1.75 per cent – https://t.co/ydDJcCVSRA

— RBA (@RBAInfo) August 2, 2022

PropTrack senior economist Eleanor Creagh said the RBA is in a challenging position, and it has to preserve its credibility with respect to the inflation target.

“The RBA has the unenviable task of tightening monetary policy whilst trying to engineer a soft landing, avoiding tipping the economy into recession,” Ms Creagh said.

“Currently, household budgets are under pressure as the cost of living has risen, along with interest rates, and put real wages growth in deeply negative territory.

“How household spending holds up against a backdrop of higher inflation and falling house prices, versus savings and wealth buffers, will be crucial in determining the loss of conditions in the economy and how high and fast the cash rate rises.”

Could this hiking cycle almost be over?

Interpreting the RBA governor’s statement, Ms Creagh said updated economic forecasts and the wording of the statement suggested the RBA may soon dial back on the size and speed of interest rate hikes.

“The RBA trimmed its GDP growth forecasts and the statement accompanying yesterday’s move signalled that the Reserve Bank is not on a pre-set path, shifting to a more data dependent stance and perhaps pointing to a return to business-as-usual 25 basis point rate rises from here,” she said.

Economists say the RBA may be signalling a slowdown in its rate hike cycle soon. Picture: Getty

CBA head of Australian economics Gareth Aird echoed that analysis, saying the board may be getting closer to the point at which the RBA will pause in their tightening cycle.

“The RBA have delivered a very significant amount of tightening in a short space of time,” Mr Aird said.

“We do not believe they are in a rush to take the policy rate much above their estimate of neutral, around 2.5%.”

“Indeed we expect that once the cash rate gets to around that level the RBA will pause to assess the impact that their policy tightening has had on the economy.”

He said Mr Lowe’s choice of words around returning inflation to target “while keeping the economy on an even keel” and the path towards this being a “narrow one and clouded in uncertainty” implied a pragmatism in how the RBA will make policy decisions over the period ahead.

While ANZ economists still expect the RBA to aggressively tighten interest rates in the months ahead, they agreed the wording may signal a reduction in the size of rate hikes.

“The key change from July is that there is no longer any reference to the withdrawal of “extraordinary” monetary support,” ANZ head of Australian economics David Plank said.

“This could be a signal that the RBA Board may be thinking about reducing the size of the monthly increases to 25 basis points in September. We think a 50 basis point increase is still the most likely choice.”

ANZ expects the cash rate will get to 3.35% by November – the boldest forecast of the big four banks.