The RBA hiked the cash rate target by 50bps to 1.35% at today's meeting, continuing the accelerated withdrawal of monetary policy support implemented during the pandemic. Today's decision followed the step up to a 50bps hike in June after the tightening cycle commenced in May with a 25bps increase. Meanwhile, the rate on Exchange Settlement balances was increased by 50bps to 1.25%.
Governor Philip Lowe's decision statement reiterated many of the key themes from his recent speech and public appearances. Rising inflation in Australia is reflecting a combination of global factors and domestic capacity constraints with demand robust and the labour market strong. As described today, rates are rising to establish a "more sustainable balance" between spending and the supply capacity of the economy and to keep inflation expectations anchored in the 2-3% target range. Today's statement emphasised the strength of the labour market, highlighting the near 50-year low in the unemployment rate and underemployment that has fallen "significantly". The RBA forecasts the labour market to tighten further given the elevated level of job vacancies, leading wages growth to lift out of its subdued pace in the years prior to the pandemic as a result.
With the RBA recently upping its forecast for peak inflation to 7% towards the end of the year, it is accelerating the withdrawal of stimulatory monetary policy. The next meeting in August will be accompanied by a new set of economic forecasts and will come in the week after the Q2 CPI data. With that report to capture more of the pass-through to energy and food prices in particular associated with the war in Ukraine and the east coast floods in Australia earlier in the year, a further upward revision to the inflation outlook is likely. For that reason, I expect another 50bps rate hike in August.
Governor Lowe noted the Board will be closely monitoring the crosscurrents for household spending amid the tightening cycle. High household savings, financial buffers and incomes underpinned by the strong labour market are supporting a resilience in spending as highlighted by today's retail sales data, though the Governor highlighted that budgets were under pressure from high inflation and rising interest rates, while housing prices were also on the decline in some markets. The other key factor is around global developments, with Governor Lowe describing the outlook as "clouded" due to the Ukraine war and China's Covid response. Real incomes are being squeezed due to high inflation and rising interest rates.
The Board's forward guidance remained intact expecting to "...take further steps in the process of normalising monetary conditions in Australia over the months ahead". As mentioned, I anticipate a 50bps hike in August to take the cash rate to 1.85% but then see the Board pausing until later in the year giving it time to assess the effect of the tightening cycle on the domestic economy and to monitor the global situation. My forecast is for the cash rate to end 2022 at just above 2% compared to market pricing for around 3%.