After catching the market off-guard with a 25 basis points (bps) rate hike in May, the Reserve Bank of Australia (RBA) made another unexpected move in June by raising the Official Cash Rate (OCR) by 25 bps to 4.10%. This decision was deemed as hawkish and unexpected just like the previous hike.
Australia’s Reserve Bank has raised interest rates once again by 25 basis points to 4.10% at its June policy meeting, surprising many. This decision comes after a surprise 25 bps hike in May. High inflation has been a major concern, currently at 7%.
Though it has passed its peak, it is still too high, leading to a rise in interest rates to give confidence for its return to target within a reasonable timeframe.
High inflation can be damaging for the economy and people’s lives. It erodes savings, affects family budgets, makes it difficult for businesses to invest, and increases income inequality.
The Board has responded to the increased risks to the inflation outlook, with goods price inflation slowing, but service price inflation persisting overseas. Unit labour costs are rising, yet productivity growth remains subdued.
The Board remains alert to the risk of expectations of high inflation contributing to more price and wage increases, particularly with a limited spare capacity and low unemployment rate.
Though the Board seeks to keep the economy steady, reaching a soft landing has a narrow path, with uncertainty in household consumption, global economy trends, and cost-of-living pressure leading to a significant decrease in household spending.
The Board remains determined to return inflation to its 2-3% target range and may require further monetary tightening to achieve this depending on the economy and inflation evolution.
The Board will keep a close eye on developments in the global economy and household spending trends to ensure a return to the target range.
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