Australia raises rates for 3rd straight month, still more to come

SYDNEY (REUTERS) – Australia’s central bank on Tuesday (July 5) raised interest rates for a third straight month and flagged more ahead as it struggles to contain surging inflation even at the risk of triggering an economic downturn.

Wrapping up its July policy meeting, the Reserve Bank of Australia (RBA) lifted its cash rate by 50 basis points to 1.35 per cent, marking 125 basis points of hikes since May and the fastest series of moves since 1994.

“The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” said RBA governor Philip Lowe in a statement.

The hike was widely expected in markets and the local dollar eased slightly in reaction to US$0.6863, while futures narrowed the odds on another half-point hike in August.

Mr Lowe was confident the economy could withstand the jolt with unemployment at five-decade lows of 3.9 per cent and job vacancies at all-time highs. Household demand has also held up well, thanks in part to A$260 billion (S$249 billion) in extra savings accumulated during the pandemic lockdowns.

Still, higher borrowing costs are bound to be a drag on spending power given that households owe A$2 trillion in mortgage debt and home values have started slipping after a bumper 2021.

The hikes delivered so far will add around A$400 a month in repayments to the average A$620,000 mortgage, and that is on top of higher costs for energy, petrol, healthcare and food.

Floods across the east coast in recent days will add to the pain by pushing up prices for vegetables and fruit.

Official data on consumer price inflation for the second quarter is due later this month and is expected to show another alarming rise to 6 per cent or more – levels not seen since a national sales tax was introduced back in 2000.

Core inflation is also likely to accelerate past 4 per cent and further away from the RBA’s target band of 2 per cent to 3 per cent.

This is a major reason why markets are priced for another half-point hike in August and rates reaching at least 3 per cent by the end of the year.

Mr Lowe himself recently conceded that there was a “narrow path” between tightening enough to control inflation or too much and tipping the economy into recession.

“(RBA) appears prepared to risk some economic harm to achieve its inflation objective,” warned Nomura economist Andrew Ticehurst. “Our view is that this pain will be realised, and we now see a recession in Australia starting early next year.