At its meeting today, the Board decided to increase the cash rate target by 50 basis points to
85 basis points. It also increased the interest rate on Exchange Settlement balances by
50 basis points to 75 basis points.
Inflation in Australia has increased significantly. While inflation is lower than in most other advanced
economies, it is higher than earlier expected. Global factors, including COVID-related disruptions to
supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic
factors are playing a role too, with capacity constraints in some sectors and the tight labour market
contributing to the upward pressure on prices. The floods earlier this year have also affected some
Inflation is expected to increase further, but then decline back towards the 2–3 per cent range
next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the
near term, inflation is likely to be higher than was expected a month ago. As the global supply-side
problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to
moderate. Today’s increase in interest rates will assist with the return of inflation to target over
The Australian economy is resilient, growing by 0.8 per cent in the March quarter and
3.3 per cent over the year. Household and business balance sheets are generally in good shape,
an upswing in business investment is underway and there is a large pipeline of construction work to be
completed. Macroeconomic policy settings are supportive of growth and national income is being boosted by
higher commodity prices. The terms of trade are at a record high.
The labour market is also strong. Employment has grown significantly and the unemployment rate is
3.9 per cent, which is the lowest rate in almost 50 years. Job vacancies and job ads are
at high levels and a further decline in unemployment and underemployment is expected. The Bank’s
business liaison program continues to point to a lift in wages growth from the low rates of recent years
as firms compete for staff in a tight labour market.
One source of uncertainty about the economic outlook is how household spending evolves, given the
increasing pressure on Australian households’ budgets from higher inflation. Interest rates are also
increasing. Housing prices have declined in some markets over recent months but remain more than
25 per cent higher than prior to the pandemic, supporting household wealth and spending. The
household saving rate also remains higher than it was before the pandemic and many households have built
up large financial buffers. While the central scenario is for strong household consumption growth this
year, the Board will be paying close attention to these various influences on consumption as it assesses
the appropriate setting of monetary policy.
The Board will also be paying close attention to the global outlook, which remains clouded by the war in
Ukraine and its effect on the prices for energy and agricultural commodities. Real household incomes are
under pressure in many economies and financial conditions are tightening, as central banks withdraw
monetary policy support in response to broad-based inflation. There are also ongoing uncertainties
related to COVID, especially in China.
Today’s increase in interest rates by the Board is a further step in the withdrawal of the
extraordinary monetary support that was put in place to help the Australian economy during the pandemic.
The resilience of the economy and the higher inflation mean that this extraordinary support is no longer
needed. Given the current inflation pressures in the economy, and the still very low level of interest
rates, the Board decided to move by 50 basis points today. The Board expects to take further steps
in the process of normalising monetary conditions in Australia over the months ahead. The size and timing
of future interest rate increases will be guided by the incoming data and the Board’s assessment of
the outlook for inflation and the labour market. The Board is committed to doing what is necessary to
ensure that inflation in Australia returns to target over time.