4 Oct 2022
.jpg)
The Reserve Bank of Australia (RBA) Board increased the cash rate by 0.25% to 2.60% at its October meeting.
October 2022 - Article provided by PSK's Chief Investment Officer Chris Lioutas.
The Reserve Bank of Australia (RBA) Board increased the cash rate by 0.25% to 2.60% at its October meeting.
The move was a change of pace following four successive 0.50% increases. The change of pace is a recognition that a lot of the heavy lifting has been done, whilst balancing the competing narratives of maintaining their inflation fighting credibility and the lagged effect on the economy and household of successive large rate increases.
They maintained that global factors explain much of the inflation impact locally, but that strong domestic demand is playing its role as our economy struggles to meet this demand. The Bank believes CPI inflation will be around 7.75% over 2022, before falling to a little above 4% over 2023 and around 3% over 2024. The Board will continue to pay close attention to both labour costs and the price-setting behaviour of firms for the period ahead in light of these inflation forecasts.
Outside of that, the Board is focused on:
- the uncertainty in the outlook for the global economy which they acknowledge has deteriorated recently
- how household spending in Australian responds to tighter financial conditions given the impact on household budgets
- falling consumer confidence and house prices, in contrast to the large financial buffers many households have built up
The drop in the cash rate increase gives the RBA added flexibility to potentially elongate their rate hiking cycle and/or add some pauses to their rate hiking cycle in period ahead if they prefer to wait for more data to come through. In saying that, if they proceed with two more hikes to round out the calendar year, this will take the cash rate to a little over 3% which might be restrictive enough depending on prevailing economic conditions. If true, the critical question then becomes how long rates need to remain at these restrictive levels to bring inflation closer to the RBA’s comfort levels.
Post the announcement, Australian government bond yields fell (prices higher), AUD/USD bounced before falling away again, and Australian equities are higher.
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
