Economy

RBA pushes the cash rate to 2.85%, inflation now expected to hit 8%

By Market Index
Tue 01 Nov 22, 4:00pm (AEST)
Costs
Source: iStock

Key Points

  • Cash rate hits 2.85%
  • RBA expects inflation to peak at around 8%
  • Monthly repayments on a 25-year, $500,000 mortgage will have increased by $760 since May

Today’s decision by the Reserve Bank of Australia (RBA) to increase the official interest rate by 0.25 percentage points, to 2.85% takes the cash rate to its highest level since April 2013.

Headline inflation soared 1.8% in the September quarter pushing annual growth to a surprise 7.3%, well ahead of the expected 1.6% quarterly growth and 7% through the year.

Following the largely expected 0.25% rise today - the seventh straight hike since May - RBA governor Philip Lowe advised the market the central bank is now flagging inflation to peak at around 8%, above the 7.75% tipped in last week’s federal budget.

As a result, Lowe expects inflation to remain above the bank’s 2% to 3% target band until at least 2025, longer than previously expected.

Strong domestic demand

Commenting on today’s Melbourne Cup Day increase governor Lowe notes while global factors explained some pressures, strong domestic demand was also a factor.

“The board expects to increase interest rates further over the period ahead ... and remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

While stating the bleeding obvious following today’s rate hike, treasurer Jim Chalmers notes inflation was the number 1 challenge for the economy and the primary focus of the Albanese government.

“Higher inflation and higher interest rates coming with it means that the pressure is coming on Australians from around the world and it’s being felt around the kitchen table,” Chalmers noted.

Based on comparison website RateCity data, at 2.85%, monthly repayments on a 25-year, $500,000 mortgage will have increased by $760 since May.

What’s next?

With consumer price growth having come in at a 32-year high of 7.3%, economists were quick to suggest inflation may now be set to peak higher than previously feared.

In the wake of the Labor’s government’s post-budget 32-year-high inflation result, leading economists now expect interest rates to hit 3.85%.

What’s clearly concerning investors is the likelihood of the higher inflation scenario outlined in last week’s budget.

Budget papers conclude that if annual price rises were to peak 1 percentage point above the current forecast at 8.75%, the impact to the economy would potentially ignite a recession.

This scenario, the budget concludes, would cut around 0.25 percentage points off growth in 2022-23, and halve growth the following year from 1.5% to just 0.75%.

Then there's the unemployment rate impact, which the budget papers suggest could rise from the current near-50-year low of 3.5% to 5.25%.

 

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Market Index

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