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MNI STATE OF PLAY: RBA Turns Hawk In Biggest Hike Since 2000

MNI (Sydney)
SYDNEY (MNI)

In hiking official interest rates by a higher than expected 50 basis points today the Reserve Bank of Australia is adopting some of the “least regrets” approach of its peer central bank the Reserve Bank of New Zealand.

The RBA on Tuesday cited “current inflation pressures” as the reason behind the 50bps hike, the second in as many months which have taken official rates to 0.85%, (See MNI STATE OF PLAY: Inflation To Drive Another RBA Hike).

The 50bps increase was the biggest since 2000, and the first time the bank had hiked rates in successive meetings since 2010.

NEIGHBOURS

Over in NZ, the RBNZ has sought to be ahead of the curve as it cut rates during the pandemic and as it now moves to tighten, also citing mounting inflation pressures.

The RBA, in comparison, was criticised for being behind the curve, but its move today showed that it too is prepared to front load rate rises to control inflation.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Governor Philip Lowe said in today’s statement.

FORECASTS

Lowe recently said he expected rates to be around 1.5% by the end of this year and reach as high as 2.5% over time, and if the bank sticks to that forecast, then there is only another 65bps in rises to come in what remains of 2022.

The RBA’s caveat, articulated in today’s statement, is that the “size and timing of future rate increases will be guided by the incoming data” and particularly assessments on inflation and employment.

This was slightly different to the bank's statement after the May rate rise, when Lowe said he expected "further increases in interest rates will be necessary over the months ahead."

The RBA on Tuesday said inflation was “higher than earlier expected,” driven by global factors such as the war in Ukraine, but also by domestic capacity constraints and the tight labour market.

Australian second quarter CPI inflation came in at 5.1% and trimmed mean inflation, the RBA’s preferred measure, is at 3.7% and outside the target range of 2% to 3% for the first time in more than a decade.

RBA forecasts for inflation have continued to be moderate, however, with the latest Statement on Monetary Policy in May forecasting trimmed mean inflation will fall to 3.1% by the end of next year and to 2.9% by June 2024, when it would be back inside the target band.

MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com
MNI Sydney Bureau | +61-405-322-399 | lachlan.colquhoun.ext@marketnews.com

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