MNI STATE OF PLAY: Household Spending A Factor For RBA Hikes

The Reserve Bank of Australia says that further interest rate hikes will be driven by “ongoing uncertainty” over household spending, and global momentum for inflation that is guiding tighter monetary policy by other central banks.

The RBA, as expected, hiked official rates by 50 basis points to 1.35% on Tuesday, the third increase in as many months after the official cash rate reached a record low of 0.10%, (See: MNI BRIEF: RBA Hikes 50bps, Says "Further Steps" To Come).

The central bank telegraphed more to come and that it “expects to take further steps” in the normalisation of policy now that the “extraordinary” support put in place during the pandemic was no longer needed, (see: MNI INSIGHT: RBA Now Data Driven As Guidance Suspended).

A LOOK AT THE ECONOMY

In its statement, the RBA said it is in the process of normalising monetary policy after the pandemic and that higher rates are creating a “more sustainable balance” between supply and demand in the economy.

The central bank cited inflation and an unemployment rate of 3.9% - the lowest in almost 50 years – as proof of the resilience of the Australian economy.

Household spending, however, has emerged as a risk, with the RBA conceding that household budgets are under pressure from the already higher rates and prices. It would be paying “close attention” to this as it assessed policy settings.

Inflation, although high at 5.1% against the RBA target of 2% to 3%, was not as high as in many other countries.

The war in Ukraine, the extended Covid-19 lockdowns in China and the pace of U.S. Federal Reserve interest rate hikes combined with some local factors flowing from a tight labour market had created some uncertainty.

Consumer price data this month for June due out on 27 July ahead of the next meeting in August will also be an important marker for the RBA's interest rate path. The RBA is maintaining its view that inflation will peak in the latter part of this year before declining, and says it remains committed to “doing what is necessary” to ensure that inflation returns to target “over time.”