For the fifth time in a row this year, the RBA has lifted its official cash rate (OCR) - this time 50 basis points again up to 2.35% on Tuesday, 6th September. The Exchange Settlement balance rate was also lifted to 2.25% from 1.75%.
The AUD barely reacted to the news, as it is still under the pressure of a very strong American Dollar, which reached its highest level in 20 years. Consequently, the AUD/USD currency pair is down to its previous low of July 10, 2022, which has not been reached since 2020. ActivTrades' Investor Sentiment Indicator, however, indicates that the community is positive on the pair at 69% versus 31% of investors who are sellers.
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The increased OCR was not a surprise to economists and traders. Inflation has been on the rise in Australia this year, as it has all over the world, and it’s predicted to increase even more approaching the end of 2022.
Currently at its highest level for over 20 years at 6.1%, forecasts are for over 7% by Christmas unless the RBA’s monetary policy strategy can bring it back under control by dampening demand.
RBA Governor, Philip Lowe made his usual statement following the RBA meeting, and addressed the need to bring inflation back to the Board’s target range of 2-3% in the medium term (around late 2024).
His comments echoed previous releases, citing global economic and supply chain difficulties relating to the conflict in Ukraine, Covid shutdowns, and other policy issues with China as the catalyst for increasing headline rates again this month.
Locally, there are contributing issues too. Demand is still very strong and out of balance with supply and the labor market is increasingly tight, as many local businesses and companies struggle for staff.
The Aussie economy continues to show growth
Governor Lowe was optimistic in his statement, pointing to the strong growth of the economy and to the boost of the national income as a result of record levels of trade.
Within his statement, Mr. Lowe spoke about the unemployment rate being at its lowest level in nearly 50 years, at 3.4%.
With job advertising and vacancies still at high levels, and wages and hours on the rise across the country as a result of the rise in demand, this has allowed many Australians to build up reserves of savings as a solid safety net buffer.
A report from the Australian Bureau of Statistics (ABS) showed that the current account surplus from the June quarter had widened on the back of increased prices and volumes from the exporting of local resources mostly from the mining industry with its mineral ores, including lithium and iron ore, but also rural goods, such as cereal, wool, and meat. An increase from A$2.8 billion in the previous quarter to A$18.3 billion was just below analyst forecasts of over $20 billion.
GDP data for the quarter up to June 2022, released on the 7th of September by the ABS, showed that the economy had grown 0.9% from the previous quarter and 3.6% over the year. The mining industry was a major factor in the increase, but household consumption was also a solid contributor, having grown 2.2%.
Spending has shifted across the board according to the report, as the country leaves pandemic conditions in its wake and returns to normal life. International travel hit 38.6% of levels prior to the pandemic over the quarter.
Australians have also headed back to social hubs and are spending more on accommodation and eating out. As a result, though, the supermarkets felt a drop in revenue of around 1.2%.
A difficult balance to strike for the RBA
While the economy seems to be strengthening compared to the last few years, there may be tough times ahead for some Australians who have over-leveraged themselves when rates were at rock bottom and purchased homes in the property market boom during 2020-2021.
The housing market is already starting to feel the pinch of rate increases, as prices begin to fall at a rapid rate around the country. Homeowners may not have felt the full brunt of the increase in their mortgage rates just yet, but it’s only a matter of time before many will be really hurting.
As a result, consumer confidence may have slightly increased in the country overall, but things are less optimistic for mortgage holders, who are battling the increasing cost of living and watching the price of their most valuable asset head down, according to the recent ANZ Roy Morgan Consumer Confidence Index.
With the fastest increases seen in over 20 years, the new GDP data showed consumer prices were up 1.8% during the last quarter and 6.1% from the previous year, with the major contributors being the increasing cost of fuel and housing.
In addition, while wages and hours are apparently increasing, they’re still trailing inflation: the Wage Price Index increased 0.7% over the quarter and 2.6% over the course of the year.
There is much to weigh up and take into consideration for the RBA as it looks toward the end of the year, but strong GDP data will undoubtedly give something of a green light to continue raising rates at its October 4thBoard Meeting, as the country seemingly continues to prove its resilience.
Governor Lowe commented in his statement that the Board was “not on a pre-set path,” with regard to further increases, but the next round’s timing and size would be guided by the labor market, and all incoming data relative to the outlook for inflation.
