SYDNEY — The Reserve Bank of Australia delivered a record ninth consecutive interest rate rise at its first policy meeting for this year, citing the stubbornness of inflation pressures and increased potential for a big jump in wages.
RBA Gov. Philip Lowe on Tuesday announced a rise in the official cash rate to 3.35% from 3.10%, saying the economy was witnessing broad demand pressures despite a rapid exit from emergency interest rate settings since May last year.
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Lowe said in a statement. “The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
The RBA’s hawkish outlook reflects its disappointment that core inflation in the fourth quarter rose 6.9% on year, beating its forecast for a 6.5% rise. Annual services inflation also rose from 3.1% in June to 5.5% in December.
“Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy,” Lowe added.
There is a lot at stake for the RBA, which faces a heightened risk that it will push the economy into recession if it continues to raise interest rates, endangering stellar gains over recent years in the job market where unemployment has fallen to its lowest levels in nearly half a century.
The average Australian mortgage repayment has already risen massively, with more than 800,000 households set to move from ultra-low fixed mortgage interest rates to sharply higher variable interest rates this year. Australia has one of the most expensive housing markets in the world, making the sudden rise in mortgage interest rates a key vulnerability for the economy.
As homeowners have felt the sting of a huge jump in interest rates, they have also seen the value of their homes fall sharply over the last year, putting some in a position where the size of their mortgages exceeds the value of their home.
Already there are signs that consumer spending is starting slow, as living costs surge and interest rates climb, with retail sales falling 3.9% in December. Still, household savings remain elevated, keeping a floor under spending, with major retail companies still reporting strong profit growth.
The longer demand pressures linger in the economy, the RBA faces increasing risks that wage growth, which has so far remained low by world standards, could start to accelerate, making the task of lowering inflation over coming years far more complex.
While the RBA has quickly tightened policy settings, it still hasn’t tapped the brakes as much as its main global counterparts, raising the question of how much further it needs to go before it can move to the sidelines.
Economists have mixed views on the outlook for interest rates, with some predicting an imminent end to the tightening cycle, while others expect the official cash rate will eventually jump to more than 4.0%.
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