Higher interest payments are on the cards for small businesses and household borrowers after the Reserve Bank of Australia (RBA) lifted its cash rate target by 0.5% to 1.85% on Tuesday.
The uptick represents the fourth monthly cash rate hike in a row, the first time the RBA has conducted so many back-to-back increases since 1990.
In his statement detailing the central bank’s decision-making process, RBA Governor Philip Lowe reiterated his focus on wrestling headline inflation down from 6.1% — and Treasurer Jim Chalmer’s estimate of 7.75% by the year’s end — while guiding underlying inflation back to the RBA’s 2-3% target range.
Tuesday’s uplift to 1.85% represents a “further step in the normalisation of monetary conditions in Australia,” Lowe said, after unprecedented levels of fiscal support through the early days of the COVID-19 pandemic.
But “the path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,” he added.
While international factors like the rippling impacts of war in Ukraine and global supply shocks caused by COVID-19 certainly appeared on the central bank’s radar, Lowe also focused on domestic issues like household spending.
“A key source of uncertainty continues to be the behaviour of household spending,” Lowe said.
Higher bank interest rates — an all-but-certain consequence of lifting the cash rate — will also impact those spending habits, Lowe added, reflecting the complex, circuitous path back to economic normalcy.
“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” Lowe said.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market.”
The 0.5% uptick was broadly expected by economists, and fits within the mid-range of most expectations.
While the uptick came below the 0.75% predictions of the most hawkish industry observers, the bulk of economists expect the RBA’s interest rate increases to carry on in the months ahead.
More to come.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
