Source link – Reserve Bank of Australia

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to
2.35 per cent. It also increased the interest rate on Exchange Settlement balances by
50 basis points to 2.25 per cent.

The Board is committed to returning inflation to the 2–3 per cent range over time. It is seeking to do this while
keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in
uncertainty, not least because of global developments. The outlook for global economic growth has
deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in
most countries, Russia’s invasion of Ukraine, and the COVID containment measures and other policy
challenges in China.

Inflation in Australia is the highest it has been since the early 1990s and is expected to increase
further over the months ahead. Global factors explain much of the increase in inflation, but domestic
factors are also playing a role. There are widespread upward pressures on prices from strong demand, a
tight labour market and capacity constraints in some sectors of the economy.

Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range. The expected moderation in inflation
reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices
and the impact of rising interest rates. Medium-term inflation expectations remain well anchored, and it
is important that this remains the case. The Bank’s central forecast is for CPI inflation to be
around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around
3 per cent over 2024.

The Australian economy is continuing to grow solidly and national income is being boosted by a record
level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring
workers. The unemployment rate declined further in July to 3.4 per cent, the lowest rate in
almost 50 years. Job vacancies and job ads are both at very high levels, suggesting a further
decline in the unemployment rate over the months ahead. Beyond that, some increase in the unemployment
rate is expected as economic growth slows.

Wages growth has picked up from the low rates of recent years and there are some pockets where labour
costs are increasing briskly. Given the tight labour market and the upstream price pressures, the Board
will continue to pay close attention to both the evolution of labour costs and the price-setting
behaviour of firms in the period ahead.

An important source of uncertainty continues to be the behaviour of household spending. Higher inflation
and higher interest rates are putting pressure on household budgets, with the full effects of higher
interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing
prices are declining in most markets after the earlier large increases. Working in the other direction,
people are finding jobs, gaining more hours of work and receiving higher wages. Many households have also
built up large financial buffers and the saving rate remains higher than it was before the pandemic. The
Board will be paying close attention to how these various factors balance out as it assesses the
appropriate setting of monetary policy.

The further increase in interest rates today will help bring inflation back to target and create a more
sustainable balance of demand and supply in the Australian economy. Price stability is a prerequisite for
a strong economy and a sustained period of full employment. The Board expects to increase interest rates
further over the months ahead, but it is not on a pre-set path. 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.

Source link – Reserve Bank of Australia