The Reserve Bank of Australia (RBA) announced a 0.50% increase in interest rates on Tuesday afternoon. That brings Australia's benchmark cash rate to 2.35%.
This marks the fifth consecutive month of rate hikes from the central bank.
The RBA began tightening its policies on 4 May, when it raised rates from the historic low of 0.10% to a still quite modest 0.25%. That marked the first increase in interest rates since November 2010. At that time, the central bank raised the official cash rate by 0.25% to 4.75%.
Today, the RBA board also increased the interest rate on Exchange Settlement balances by 0.50% to 2.25%.
S&P/ASX 200 Index (ASX: XJO) shares had fallen 0.50% since this morning in the lead up to the central bank's announcement at 2:30pm AEST. Since the announcement, ASX 200 shares have dipped another 0.1%, suggesting the market had broadly priced in the rate hike.
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Why another interest rate hike from the RBA?
The RBA is determined to bring inflation back to its target rate of 2% to 3% "over time".
The latest quarterly inflation figures came in at 6.1%. And that number is expected to peak higher by the end of the year before beginning to trend lower.
According to RBA governor Philip Lowe:
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.
Lowe said the bank expects inflation to begin falling, driven lower by the "ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates".
The RBA's central forecast for CPI inflation is around 7.75% for 2022, "a little above" 4% over 2023 and around 3% in 2024.
Tight labour markets see wages beginning to rise
Lowe pointed to tight labour markets beginning to fuel wage growth. This could add to inflationary pressures as companies may then pass these costs on.
"Wages growth has picked up from the low rates of recent years and there are some pockets where labour costs are increasing briskly," he said.
July's unemployment rate dipped to 3.4%, the lowest in half a century.
The behaviour of household spending in the months ahead remains "an important source of uncertainty".
On one side of the ledger, Australians have more job opportunities, rising salaries, and greater household savings levels accrued during the pandemic restrictions.
On the other side of that ledger, Lowe said, "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."
What's next for RBA interest rate policies?
Looking ahead, Lowe said:
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.
