Australia – RBA tightens for the fourth consecutive month as expected

In line with ours and market expectation, the Reserve Bank of Australia’s (RBA) cash rate now stands at 1.85% after the central bank raised it by 50bps for the third time in a row (June and July) while May was 25bps. The last time it reached this level was back in 2016.

The rollback of the accommodative policy signalled an effort by policymakers to return the inflation level back to its target of 2–3% range from the 2nd quarter of 2022 level of 6.1% y/y with core inflation rate hitting 5.3% y/y, its fastest pace since the year 2001, without overkilling the domestic economy.

Aside from surging commodity prices brought about by the UkraineRussia war, households’ large savings and the tight local labour market have also been pressuring the price level towards the upside.

According to the treasurer, inflation will peak at 7.75% by December. It will not drop back to the RBA’s target range of 2% to 3% until the year ending in June 2024.

With the pace of aggressive rate hikes, the economy is expected to slow down in 2022 to 3.1% (3.25% projected by the RBA) from our previous projection of 4.1%. We expect growth to further decelerate in 2023 to 1.6% (1.75% by the RBA).

Source: AmInvest Research - 3 Aug 2022