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RBA increases cash rate to 0.85 per cent

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Cash Rate comments – June 2022

Anneke Thompson, Chief Economist, CreditorWatch

RBA increases cash rate to 0.85 per cent:

Today’s increase in the cash rate from 0.35 per cent to 0.85 per cent reflects the Reserve Bank of Australia’s (RBA’s) increasing concern around price escalations across the economy. Senior executives among the grocery, construction and logistics sector have recently been advising their customers to continue to expect prices to rise, as many products have not yet fully repriced.

July 1 is also a key date to consider, as many salaries are reviewed from this date, and probably a larger than normal repricing of consumables will happen at this time as well. Steven Cain, CEO of Coles, recently advised that he had five times as many of his supermarket’s suppliers requesting price rises than at the same time last year. Already prices at Coles and Woolworths over the March quarter have risen by 3.2 per cent and 4.3 per cent respectively.

The new Labor Federal Government has also thrown its support behind an increase in the minimum wage to match the latest inflation figure of 5.1 per cent. While the decision rests with the Fair Work Commission, there is general consensus amongst economists that workers on minimum wage need a relatively generous pay increase to keep up with price rises and rising home loan rates. If real wages go too far backwards, the risk of recession and rising unemployment rises significantly.

Looking forward, Federal Treasurer Jim Chalmers has already indicated that inflation projections inherited by the new government will need to be revised upwards. This may see an upwards revision of the cash rate peaks by various market economists. However, offsetting this scenario is weaker than expected labour force data in April, when only 4,000 additional people became employed over the month. The RBA will need to carefully balance both the cost of living and employment issues against rising inflation.