Australia’s central bank on Tuesday raised interest rates for a third straight month and flagged more ahead as it struggles to contain surging inflation even at the risk of triggering an economic downturn.
Wrapping up its July policy meeting, the Reserve Bank of Australia (RBA) lifted its cash rate by 50 basis points to 1.35%, marking 125 basis points of hikes since May and the fastest series of moves since 1994.
“The Board expects to take further steps in the process of normalizing monetary conditions in Australia over the months ahead,” said RBA Governor Philip Lowe in a statement.
The hike was widely expected in markets and the local dollar eased slightly in reaction to $0.6863 while futures narrowed the odds on another half-point hike in August.
Lowe was confident the economy could withstand the jolt with unemployment at five-decade lows of 3.9% and job vacancies at all-time highs. Household demand has also held up well, thanks in part to A$260 billion ($178.59 billion) in extra savings accumulated during the pandemic lockdowns.
Still, higher borrowing costs are bound to be a drag on spending power given households owe A$2 trillion in mortgage debt and home values have started slipping after a bumper 2021.
The hikes delivered so far will add around A$400 a month in repayments to the average A$620,000 mortgage, and that is on top of higher costs for energy, petrol, health and food.
“Rates were expected to rise, and they’re expected to bite,” was the response of Treasurer Jim Chalmers, whose Labor Party won power less than two months ago.
Floods across the east coat in recent days will add to the pain by pushing up prices for vegetables and fruit.
Official data on consumer price inflation for the second quarter is due later this month and is expected to show another alarming rise to 6% or more, levels not seen since a national sales tax was introduced back in 2000.
Core inflation is also likely to accelerate past 4.0% and further away from the RBA’s target band of 2-3%.
This is a major reason markets are priced for another half-point hike in August and rates reaching at least 3.0% by the end of the year.
Lowe himself recently conceded that there was a “narrow path” between tightening enough to control inflation or too much and tipping the economy into recession.
“It appears prepared to risk some economic harm to achieve its inflation objective,” warned Nomura economist Andrew Ticehurst. “Our view is that this pain will be realized, and we now see a recession in Australia starting early next year.
“With inflation somewhat sticky, we expect rate cuts to be somewhat delayed, but have penciled in three 25bp cuts towards the end of next year.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.