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Australia Monetary Policy May 2022

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

At its monetary policy meeting on 3 May, the Reserve Bank of Australia (RBA) hiked the cash rate from an all-time low of 0.10% to 0.35%, and hinted at further tightening ahead.

The Bank raised rates based on the economy’s resilience to global supply bottlenecks, the headwinds posed by the fallout of the war in Ukraine and mounting inflationary pressures, which are being made worse by domestic capacity constraints. The Bank also withdrew some of its extraordinary monetary support; it will stop reinvesting the proceeds of maturing government bonds and significantly shrink its balance sheet over the next couple of years. The Bank sees inflation averaging around 6% this year and moderating to around 3% only by mid-2024. It sees GDP growth at 4.3% this year and at 2.0% in 2023.

The Bank assumed a markedly more hawkish tone in its communiqué, stating that it will do “what is necessary to ensure that inflation in Australia returns to target over time” and that this will require “a further lift in interest rates over the period ahead”.

Commenting on the release, Robert Carnell, regional head of Asia-Pacific research at ING, cautioned against taking the Bank’s words at face value:

“At first glance, it feels as if the RBA is now committed to a slow but steady ratcheting up of monetary policy rather than a Fed-style front-loaded hiking cycle. But equally, given how misleading central bank guidance has been in recent years, it feels too soon to be taking a firm view on the future path for rates.”

The next monetary policy meeting is scheduled for 7 June.

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