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Fast tightening cycle should slow inflation with household spending already squeezed, economists say
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RBA raises rates to 2.85%, expects CPI to peak before 2023
02 November 2022
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10 minute read
The RBA has raised the cash rate for the seventh month in a row, again by 25 basis points, with governor Philip Lowe saying it was committed to bringing down inflation and he expected it to peak at around 8 per cent later this year.
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The move takes the cash rate to 2.85 per cent from 0.1 per cent in May, the fastest tightening cycle in decades.
“As is the case in most countries, inflation in Australia is too high,” Mr Lowe said. “Over the year to September the CPI inflation was 7.3 per cent, the highest it has been in more than three decades.”
“A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year.”
“Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.”
The move was widely anticipated with Westpac the only one of the big four banks to predict a 50 basis point increase.
The RBA revised downwards its forecast for GDP growth to 3 per cent for 2022 and 1.5 per cent for each of the following two years.
“The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade,” said Mr Lowe.
ABS figures this week showed retail turnover increasing by 0.6 per cent in September compared with the previous month, and up 17.9 per cent year on year.
The latest rate increase would heap additional pressure on households, particularly as economic conditions were expected to get worse in 2023, said CreditorWatch chief economist Anneke Thompson.
“Combined with the budget’s forecast rising of prices on everyday goods, housing and energy, and lacklustre wages growth, this latest increase in the cash rate all but guarantees consumer confidence will weaken as we enter the busy Christmas retail period,” she said.
“The RBA has a dual role to maintain inflation within the target band of 2–3 per cent and also maintain full employment. Clearly, those two aims are incompatible in the current environment, as it will be almost impossible to bring inflation back to the target band if employment remains ‘full’.
“It is likely given all signs are pointing to a weakening economy, that the RBA will take slower steps in tightening monetary policy, as it tries to avoid sending Australia into recession.”
BDO economist and project and infrastructure advisory partner Ally Flint said there was a sign of hope in the bleak outlook.
“In what is mostly a gloomy forecast for borrowers, the higher interest rates should put some pressure on the Australian dollar to move higher against the greenback, providing some relief for overseas travellers over Christmas,” he said.
CPA Australia’s senior policy manager Gavan Ord said small businesses that were already struggling now faced an uphill battle.
“The RBA’s rate rise today was to be expected, inflation is still running hot and we expect further rises in the coming months,” said Mr Ord.
“Businesses are bracing for a not-so-merry Christmas, households are also facing the double whammy of rising costs and higher interest rates.”
“Business should prepare for customers changing what they spend on and where during the biggest holiday of the year.”
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