RBA presses go on the cash rate increase

The RBA has pressed “go” on the interest rate tightening cycle and lifted the cash rate by 0.25 percent.

The Statement by Governor Lowe noted that the resilience of the economy meant” now was the time to begin withdrawing some of the extraordinary monetary support”. It also recognised that, as shown in the latest CPI data released last week, inflation is now higher and more pervasive across the whole economy.

Combined with the anecdotal market evidence that wages are now growing at above pre-COVID level rates, today’s 25bp movement in the cash rate is a sign that the RBA is playing catch-up with respect to interest rate settings in this country.

Given that inflation has surprised the RBA on the upside, the real question surrounding the cash rate is not if the cash rate should have risen, but rather what should it rise to and how fast will the RBA take it there.

Quite recently the cash rate in Australia was considered to be at a neutral level – neither expansionary nor contracting, the ‘goldilocks’ official rate – when it was sitting at around 3 percent. Some economists are now suggesting, that given the level of debt being carried across households, this neutral rate is now somewhere around mid-1 percent.

It is difficult to accurately say the precise level of a non-stimulatory/non-contracting official interest rate – however KPMG considers it is most likely to be lower than historical levels, and probably closer to 2 percent  to 2.5 percent .

This means we are likely to see the quick succession of 0.25 percent rate rises over the coming months on top of today’s rise of 0.25 percent . Given the uncertainty of global economic factors the RBA needs to be moderate in its interest rate ramp – there is no need for a sharp handbrake on the economy.

KPMG considering that a reasonable trajectory for the RBA to follow being a target cash rate of 1 percent to 1.25 percent  by the end of this year. This means another three to four 25bp rises over the next 7 months.

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