The Reserve Bank of Australia (RBA) has chosen to lift the interest rate by just 25 basis points – the same rise as in October – for the seventh increase in as many months. The cash rate will now sit at 2.85 per cent, although another rate rise is still looming on the horizon in December, just in time for Christmas.
As seen on Domain, some economists were predicting a bigger 50 basis point rise coming out of the RBA board meeting on Tuesday following the release of the latest inflation rate last week of 7.3 per cent in the third quarter, up from 6.1 per cent in the second, and above the market forecasts of 7 per cent.
“The central bank sometimes has to be the bad boy at the party, taking away the punchbowl in the early hours of the morning,” said David Plank, the head of the ANZ Bank’s Australian economics team. “They just can’t allow inflation to get embedded, as we all know the long-term costs of that can be very significant.
“But the RBA doesn’t want to be seen as flip-flopping and the reasons they set out for the 25-point rise last month still apply today.”
Price rises have been fuelled, according to the Australian Bureau of Statistics (ABS), by higher prices for food, new dwelling construction and petrol. With the RBA wanting to contain inflation to a 2 per cent to 3 per cent band, the actual figure is still a long way off that goal.
But the real pain would come from higher unemployment rather than an interest rate that more closely resembles a normal housing market, Peter Tulip, chief economist at the Centre for Independent Studies, believes.
“The rise of 25 points is disappointing as my vote would have been for 50 points or even 75,” he said. “With underlying inflation at its highest level in decades and rising quickly, maintaining a negative real cash rate, which is interest rates below inflation, is hard to justify, especially as we see further strong upward pressure on major components like wages, rents, imports and energy.
“The increase in rates so far is not nearly enough to get the economy back on target soon. It hasn’t even been enough to raise the exchange rate, the most important channel by which monetary policy influences inflation. There remains a large risk that expectations of inflation will start to adapt to recent price increases. If expectations do rise, a large increase in unemployment will be needed. We have a choice between a sharp increase in interest rates now or an even larger increase if we delay. The former would be less painful and less risky.”
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