On July 5, 2022, the Reserve Bank of Australia announced a raise in the target cash rate… again to dampen the effects of the record-high inflation rate. The cash rate now sits at 1.35%, 50 basis points higher than the previous rate of 0.8% back in the month of June. The RBA imposed the first hike this year in May at 0.35%. Proper to this, the country’s cash rate stayed at 0.1% since November 2020.
Inflation leaves us no choice
The continuous soaring of inflation is attributed to the ongoing war in Ukraine. Added to that is the lingering effect of the supply chain issues linked to Covid-19. However, according to Governor Philip Lowe, on top of these global factors, domestic factors also play a role in the continuous hike in the price of consumer goods. Some of them are the tight labour market, some capacity constraints, and the strong demand from consumers. The floods that swept Sydney back in March still have some lingering effects, especially on the prices of agricultural products.
More rate hikes to come
The RBA is gearing up for the possibility of the inflation rate hitting 7% by the end of the year. If it does happen, the RBA says it will take years to keep inflation under control and to cool down the economy.
Even though household saving ratios are higher than average right now, the RBA is keeping tabs on household spending.
Economists are convinced that rate hikes will become a regular thing until the RBA reaches a neutral cash rate of around 2% to 2.5% in the next year.
Major banks have seen this coming and announced a rise in interest rates prior to the July announcement.