The Reserve Bank of Australia (RBA) has shocked borrowers and financial markets by resuming interest rate rises after a one-off pause last month. It has lifted its cash rate target from 3.6 to 3.85 per cent, marking the 11th increase in the space of a year. How could it come up with that decision given what it said in April and the new data we have seen since then?
Last month, when the RBA decided after 10 straight meetings to keep the cash rate steady, it presented a number of reasons. The chief was that “a range of information, including the monthly CPI indicator, suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to global developments and softer demand in Australia.”
In effect, the worst was behind us, but there was still a lot of impact from the 350 basis points worth of rate rises still to hit the economy, so let’s pause and see how things go.
So how did things go?
Well, a couple weeks afterwards, the latest quarterly and monthly inflation figures confirmed that inflation has peaked.
RBA governor Philip Lowe said the board had paused rate rises last month to assess the impact of previous rate rises on the economy, and strong jobs and inflation data meant it had more work to do to get price rises under control. “Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” he noted in his post-meeting statement.
Additionally, he said that leaves the possibility of further rate rises to come.
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