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Australia Monetary Policy July 2022

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

At its monetary policy meeting on 5 July, the Reserve Bank of Australia (RBA) hiked the cash rate from 0.85% to 1.35% and hinted at further tightening ahead.

The Bank raised rates again as prolonged supply constraints stemming from the war in Ukraine and Covid-19 lockdowns in China, coupled with a tight labor market, continued to exert upward inflationary pressures. The Bank expects inflation to peak this year and then decline back towards the 2.0–3.0% target range in 2023, while medium-run inflation expectations remained anchored: next year, commodity prices should stabilize and supply disruptions should ease, taming price pressures.

The Bank maintained a hawkish tone in its communiqué, stating that it “expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead” as it stands ready to do “what is necessary to ensure that inflation in Australia returns to target over time”. That said, the Bank did not offer any explicit forward guidance, stating that the magnitude and timing of future rate hikes will depend on new data and the Bank’s assessment of the inflation and unemployment outlooks.

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

“The RBA has already ended QE purchases of Australian bonds (in Jan), chosen to end reinvestment of maturing bonds (in May) and provided explicit guidance that it views outright bond sales as only a remote possibility. […] We continue to expect a series of rate hikes over the coming months. We now see the RBA hiking by another 90bps in the remainder of 2022 to bring the cash rate target to 1.75% by year-end (compared to 1.25% previously), before continuing to rise more gradually over 2023. We retain the same peak of 2.50%, but now expect this to be reached sooner (around mid-2023) than previously forecast (around end-2023).”

The next monetary policy meeting is scheduled for 2 August.

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