RBA confirms further interest rate increase in coming days

Highlights:

• Countries worldwide are witnessing an increase in interest rates, driven by tragic events in Ukraine, and supply chain disruption.
• In headline terms, inflation in Australia was 5.1% over the year to the March 2022 quarter.
• In underlying terms, the inflation rate was 3.7%.
• Australians may see a further increase in the interest rate in the coming days.

In a speech to the American Chamber of Commerce in Australia (AMCHAM), Governor Philip Lowe talked about the rising inflation worldwide and in Australia. The rise in the interest rate was due to the tragic events in Ukraine. As a result, there was an increase in energy and food prices.

In the US and Europe, inflation is above 8%, and it is expected to increase further. Inflation has also increased across Asia. In Japan, inflation is just above 2%. Like many other advanced countries, Australia also witnessed an increase in interest rates. However, it is less than most of these developed counties. In headline terms, inflation in Australia was 5.1% over the year to the March 2022 quarter, which is the highest rate in several years. In underlying terms, the inflation rate was 3.7%. It is higher than it has been in recent years. However, the number is still below what it was during the resources boom.

Key Data:

1. Supply chain interruption during the pandemic and the Russia-Ukraine war has triggered major interruptions to the global markets for energy and food. As a result, the oil prices have increased 28% since February 2022. Wheat and vegetable oil prices have also increased.
2. Petrol prices in Australia are up by 37% over the previous year. It is independently adding ~ 1 percentage point to headline inflation.

1. Following the solid recovery from the COVID-19, the rise in domestic spending is testing the economy’s potential to fulfil the demand for goods & services. In the labour market, many companies report that the accessibility of labour is a major constraint on their capacity to operate and expand.
2. In the recent forecast in May 2022, RBA expected that inflation would peak at around 6% in 2022. This number has now increased to 7%, driven by rising petrol prices and the outlooks for retail electricity and gas prices, which are being amended higher due to pressures on capacity in that sector.

Factors that lie behind this assessment that inflation will moderate in 2023.

1. Some of the pandemic-linked supply-side difficulties in the global economy are slowly being fixed. The businesses are now correcting to their new operating environment and answering the problems in global production and logistic networks. Currently, delivery times have lessened from the previous year.
2. The prices of semi-conductor have moved down from their recent peak. The global production of cars is indicating signs of a recovery.
3. The tightening of monetary policy worldwide and in Australia provides confidence that inflation will decline. The higher interest rates around the world will aid in creating a more sustainable balance between the demand for goods and services and the ability of the economies to meet that demand.

Based on the inflation data and outlook, Governor Philip Lowe said it is inappropriate for Australia’s interest rates to remain at the COVID-emergency levels. Further, the rise in labour costs has picked up since the past few months and is expected to continue in the coming months.

In the existing environment, RBA’s board is committed to doing what is essential to confirm that inflation returns to the 2% to 3% target range over time. Governor Philip Lowe also stated that higher inflation damages the economy, reduces people's purchasing power, and impacts their savings.

Further, he said that mid-year inflation would be around 2% to 3%. However, Australians should now prepare themselves for a further increase in the interest rate.

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