Australia’s Reserve Bank lifted the cash rate to an 11-year high of 4.1% at its June policy meeting on Tuesday and warned further rises might be needed if inflation didn’t start falling convincingly.
The outcome of Tuesday’s policy meeting was not expected but neither was it a foregone conclusion. Futures markets had forecast a 68% chance of a pause, as did two-thirds of economists surveyed by Bloomberg.
But up rates went by another 0.25 percentage points, with more potentially more rises in the offing if inflation remains stubbornly high.
The rise saw the ASX almost double its fall for the day, plunging 30 points in less than a minute to 7135. It then rose slightly but settled back to closer lower at 7,130 for a loss of 86 points or 1.2% for the day.
The Aussie dollar saw the same reaction – but in reverse – up went the value of the currency against the greenback by 40 points in less than a minute to around 66.71 US cents from US66.30. The Aussie then rose to around 66.80 US cents heading into European trading late Tuesday.
The yield on 10-year Aussie bonds jumped to 3.85% from 3.77% just before the 2pm announcement, then settled back to around 3.81%.
The cash rate of 4.1% is a new decade high and will push even more Australians into mortgage stress after more than a year of bill hikes.
According to RateCity, the total squeeze on a half-million-dollar mortgage since May 2022 (when the RBA started lifting rates) is now more than $1,100 a month.
RBA governor Philip Lowe said central bankers decided to hike in June amid fears high inflation for services will be too persistent because of rising wages and very low productivity growth.
“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 said in a statement.
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”
The cash rate target has now increased more than 4 percentage points since from a record low 0.1 per cent, with all of the hikes coming over the past 13 months.
“The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market,” Dr Lowe said.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
At a media conference after the RBA decision was revealed, Federal Treasurer Jim Chalmers acknowledged it would be difficult for the central bank to bring inflation down without crashing the economy into a recession.
“That is the inevitable consequence I think of higher interest rates biting at the same time as the global economy is a precarious place,” he said.
“The job that the independent Reserve Bank has is to try and get on top of this inflation challenge in our economy without crashing our economy, and we’ve known for some time that that is a difficult path to tread.”
When asked directly about the risk of a recession, in light of the most aggressive rate hiking cycle since the 1980s, Chalmers said it was not in any Treasury or Reserve Bank forecasts.
“That’s not our expectation,” he said.
