Economic Snapshot
3 mins read

RBA raises official cash rate to 1.35%

Anneke Thompson, Chief Economist, CreditorWatch

Cash rate rise scenario:

The Reserve Bank of Australia (RBA) has once again increased the cash rate by 50 basis points to 1.35% in an effort to reign in inflation before a ‘spiral’ sets in. Today’s announcement is unsurprising, given recent comments by both Governor Philip Lowe and Treasurer Jim Chalmers that inflation is likely to be around seven per cent year’s end. Under this scenario, it is highly likely that further increases in the cash rate will be announced as the RBA is probably beyond taking a ‘wait and see’ approach to the impact of their cash rate rises and will need to continue raising rates until they get comfortable that inflation is starting to move down. Continued dialogue with major retailers, wholesalers, logistics groups and construction companies will be essential to gain an understanding as early as possible as to the direction of price movements.

One area that is already been impacted by cash rate increases is the housing market. The Corelogic Home Value Index for June 2022 shows that house prices in Sydney and Melbourne dropped by 2.8 and 1.8 per cent respectively over the quarter. Hobart also saw a slight reduction (-0.2 per cent) while most other markets flatlined. The only market that recorded some reasonable growth over the quarter was Adelaide’s, at 5.1 per cent.

The RBA will monitor house price movements closely, as Australian homeowners are heavily impacted by the ‘wealth effect’. Coupled with a falling share market, for those with investment portfolios, this has a surprisingly large negative impact on consumer sentiment. Nobody likes falling asset values, but, perversely, it presents an opportunity for the Australian economy. The hope being that the combined impact of the wealth effect and reduced disposable income will bring inflation down faster than in countries where household debt isn’t as high.

Of continuing concern is supply side inflation. Neither the RBA or the government has much control over this type of inflation, and it will take some months to determine if reducing demand has enough of an impact to bring prices under control.

Cash rate stable scenario:

The Reserve Bank of Australia (RBA) has pulled out a big surprise by keeping the cash rate stable today. Today’s announcement is very surprising, given recent comments by both Governor Philip Lowe and Treasurer Jim Chalmers that inflation is likely to be around seven per cent year’s end. Under this scenario, it is highly likely that further increases in the cash rate will be announced as the RBA is probably beyond taking a ‘wait and see’ approach to the impact of their cash rate rises and will need to continue raising rates until they get comfortable that inflation is starting to move down. Continued dialogue with major retailers, wholesalers, logistics groups and construction companies will be essential to gain an understanding as early as possible as to the direction of price movements.

One area that is already been impacted by cash rate increases is the housing market. The Corelogic Home Value Index for June 2022 shows that house prices in Sydney and Melbourne dropped by 2.8 and 1.8 per cent respectively over the quarter. Hobart also saw a slight reduction (-0.2 per cent) while most other markets flatlined.

The only market that recorded some reasonable growth over the quarter was Adelaide’s, at 5.1 per cent. The RBA will monitor house price movements closely, as Australian homeowners are heavily impacted by the ‘wealth effect’. Coupled with a falling share market, for those with investment portfolios, this has a surprisingly large negative impact on consumer sentiment. Nobody likes falling asset values, but, perversely, it presents an opportunity for the Australian economy. The hope being that the combined impact of the wealth effect and reduced disposable income will bring inflation down faster than in countries where household debt isn’t as high.

Of continuing concern is supply side inflation. Neither the RBA or the government has much control over this type of inflation, and it will take some months to determine if reducing demand has enough of an impact to bring prices under control.

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