March 07, 2023 (MLN): The Reserve Bank of Australia (RBA), has raised interest rates for the 10th consecutive time to 3.60%, the highest level in over a decade.
However, the bank also indicated that progress has been made in taming inflation, and further increases may be coming to an end. RBA Governor, Philip Lowe, stated that while further monetary tightening may be necessary, the bank is mindful that labor market conditions remain tight.
The RBA’s shift in the language surrounding its plans for further monetary tightening may signal that global central banks are taking different paths in battling with inflation. While the US Federal Reserve has recently stated that higher rates may be necessary to combat inflation, other central banks, including those in Canada and the UK, have either paused rate increases or signaled that a break may soon be taken.
Australia’s border closures during the Covid-19 pandemic have aggravated labor shortages, which have contributed to high inflation. However, recent data shows that higher interest rates are starting to cool the economy. While the consumer-price index rose 7.8% over the 12 months to the December quarter, the rate of increase slowed in January to 7.4% annually.
Gross domestic product growth in the fourth quarter was weaker than expected, and wage increases remain subdued, easing concerns about a spiral in which wages and prices rise together.
Despite this, the timing of when the RBA will pause its rate increases is uncertain. Many mortgages in Australia effectively have floating rates, so people have to pay more interest on their loans as rates go up, which could further subdue consumer spending. Long-term wage agreements covering many workers are also slowing the rate at which wages are rising.
Governor Lowe also indicated that global factors will weigh heavily on the bank’s decision-making in the coming months, particularly given that Fed officials have indicated that more rate rises could be necessary to tame inflation in the US. “Global inflation remains very high. It will be some time before inflation is back to target rates,” Mr. Lowe said.
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Posted on: 2023-03-07T11:50:33+05:00