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Australia Monetary Policy August 2022

Australia: RBA hikes rate further in August; hints at further hikes ahead

At its monetary policy meeting on 2 August, the Reserve Bank of Australia (RBA) hiked the official cash rate (OCR) from 1.35% to 1.85%, as had been widely expected by markets. Moreover, the Bank hinted at further tightening ahead.

The Bank raised rates in an effort to tame inflation, which is being fueled by both external and domestic factors. Protracted global supply disruptions, a tight domestic labor market and strong domestic demand continue to exert upward pressure on pricing. Inflation jumped to 6.1% in Q2, and the Bank expects it to peak later this year and then decline towards the 2.0–3.0% target range in 2023, thanks to easing global supply-side constraints, stabilizing commodity prices and rising interest rates. Inflation is seen at 7.8% during 2022 as a whole, slightly above 4.0% in 2023 and around 3.0% in 2024.

The Bank maintained a hawkish tone in its communiqué, reiterating that it “expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”. However, it repeated that it would conduct monetary policy “not on a pre-set path” but guided by data and the evolving outlook for both inflation and the labor market.

Commenting on the release, Lee Sue Ann, economist at UOB, stated:

“We still expect the RBA to hike in coming months but hikes are likely to be slower and shallower. Our forecast remains for the OCR to reach 2.10% by year-end, and for it to reach 2.50% by mid-2023.”

The next monetary policy meeting is scheduled for 6 September.

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