RBA Says Economy Is Responding to Higher Rates, Another Hike Still in Play
Synopsis
The Australian central bank said earlier rate hikes are having their intended effect and financial conditions have become restrictive, although policymakers have not ruled out another increase if inflation risks persist.
Australia's central bank says its campaign to raise interest rates is doing its job as the cost of borrowing starts to hit the economy, but it's open to more hikes if inflation proves more persistent.
RBA Governor Michele Bullock had told a parliamentary committee on Tuesday that the previous cash rate hikes had already caused financial conditions across Australia to tighten and had been responsible for an economic downturn and slower domestic demand and increased borrowing costs for the business sector.
The RBA has already lifted the cash rate three times this year, to 4.35 per cent, its highest level in more than a decade. While there was no guidance on when to expect another move, Bullock said a further rate rise would remain an option if Australia's inflation failed to return to the RBA's 2 per cent to 3 per cent target in a reasonable timeframe.
Inflation Progress Remains Uneven
Pressure on prices may have eased, but inflation remains elevated. Latest ABS CPI data showed annual inflation easing to 4.2 per cent in April. The RBA previously forecast that inflation would reach a temporary high of just 4.8 per cent over June, and then begin easing.
Higher petrol prices were a key contributor, Bullock warned lawmakers, adding that price pressures were also building elsewhere in the economy, such as construction costs. But high borrowing costs were curtailing economic demand in turn, limiting inflationary pressures overall.
As before, the RBA will focus on data, not a pre-determined plan for rate settings, with the rate of inflation and overall economic conditions among the data points watched by the central bank.
Growth Slows as Labour Market Holds Up
Recent figures indicated weaker overall economic growth, along with a surprisingly firm labour market. Australian economic growth slowed to 0.3 per cent over the three months ended March as demand by households and the private sector weakened, according to the Australian Bureau of Statistics (ABS).
Despite ongoing economic improvement, the unemployment rate was in historical lows at 4.4 per cent in May. “A modest increase in the unemployment rate would not constitute a sharp deterioration in economic conditions which would likely prompt further action on the part of the RBA with regard to controlling the path of inflation," Bullock told lawmakers.
Global Policy Makers Face Similar Challenge
The RBA’s strategy for the Australian economy is aligned with policy makers in major international markets, such as the United States Federal Reserve which is keeping borrowing rates elevated due to persistent inflation pressures, and the European Central Bank (ECB), whose policy response aimed to control inflationary pressure at the risk of some loss of economic growth and who has moved to gradual monetary easing.
For investors looking to Australia’s approach to monetary policy, and indeed, worldwide developments, recent movements from the Reserve Bank underscore why economic data are critically important and how the approach of keeping policy firm will not easily yield before evidence points to a controlled moderation of inflation.
Source: The West Australia
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Pooja Malik is a business journalist with over six years of experience covering startups, entrepreneurship, and emerging trends. She has previously worked with leading media platforms such as YourStory Media and BW BusinessWorld, where she reported on business, policy, and market developments. Currently, she serves as Editor at The Inspirepreneur Magazine, where she writes and edits stories across business, lifestyle, and travel, with a focus on clarity, accuracy, and reader relevance.
