The Reserve Bank of Australia has increased the cash rate target a fifth time, to 2.35%, in an attempt to contain inflation.
It has also bumped up rates for exchange settlement balances to 22.25%.
Bank governor Philip Lowe said the bank’s board wants the inflation rate to return to the 2-3% range but that interest rates will continue to rise. Inflation is expected to continue to hover above that range.
“Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead. Global factors explain much of the increase in inflation, but domestic factors are also playing a role,” Lowe said.
“There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.”
Another domestic factor impacting the inflation rate, which hit a record high of 6.1% for the June quarter, is the increase in various prices as a result of the floods that had occurred across the country.
Global factors cited by Lowe include but are not limited to the continuing impacts of the Russian invasion of Ukraine as well as policy challenges arising in China.
The RBA’s interest rate hike comes just days after the bank, which is undergoing a review initiated by Treasurer Jim Chalmers, released its 2022-23 corporate plan.
It sets out the RBA’s core purposes such as the central bank’s focus on price stability and full employment, the stability of the financial system, and the overall security and stability of the payment system.
The new corporate plan includes a section that sets out the impact of the coronavirus pandemic on economic conditions.
“The global economy has recovered strongly from the COVID-19 pandemic, supported by the rollout of effective vaccines and significant fiscal and monetary policy support. But the outlook has become clouded by high inflation,” the corporate plan said.
“The increase in inflation to levels well above central banks’ targets has reflected ongoing disruptions to global goods production at a time of strong demand, as well as sharp increases in energy, food and other commodity prices following Russia’s invasion of Ukraine.”
Various factors are cited in the corporate plan as testing the Australian economy but the economy has remained “resilient”.
“Supported by fiscal and monetary policy, economic activity has weathered the disruptions induced by outbreaks of COVID-19 and the east coast floods. Household and business balance sheets are generally in good shape and there is a large pipeline of investment that will support activity in the period ahead,” the document read.
”Conditions in the labour market are the tightest they have been in many years and labour costs are picking up.”
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