The Reserve Bank of Australia’s (RBA) Monetary Policy Board has voted to lift its official cash rate from 4.35% to 4.6% because of high fuel prices, artificial intelligence-related investment, and capacity constraints.
The Board’s strategy is to bring inflation back down to target in a reasonable time while trying to maintain a strong labour market, RBA Governor Michele Bullock told reporters on 29 September.
“[But it] will … increase interest rates again if that’s what’s needed to get inflation down,” Bullock said. “What we’re trying to do is make sure that we have financial conditions tight enough so that, looking forward, … inflation pressure eases,” Bullock added.
The Board considered holding its cash rate target at 4.35% because of downside inflation risks related to housing costs and Iran war-related uncertainty. It raised its target because of more severe upside risks.
Australia’s housing-related inflation rate reached 5% in July, down from 6.8% in June, likely because of a drop in house prices. Dwelling sales prices rose by 3.9% on the year in July, after growing by 5.8% in June, data from analytics firm PropTrack show.
The US-Israeli war in Iran has hurt the Australian economy and could further increase consumer prices if it continues, according to Bullock.
“Fuel prices, fertiliser prices, transport prices; all these things are permanently higher [because of the war]. [The] idea that they would go up and then come down again just hasn’t happened,” Bullock said.
“The longer [the conflict] goes, the more likely it is that businesses will just try to pass through cost increases … If they’re in industries [with excess demand], they might be able to pass [them] on,” Bullock added.
Australian refined fuel prices have increased in recent weeks because of renewed violence in the Middle East and Brent crude price hikes.
Retail petrol and diesel prices in Australia’s five largest cities averaged A$2.37/litre and A$2.86/litre, respectively, on 23 September, up from A$2.05/litre and A$2.49/litre on 2 September, data from the Australian Competition & Consumer Commission (ACCC) show.
Brent crude futures prices last traded at $103.68/barrel on 25 September, up from $94.65/barrel on 1 September, data from Trading Economics show. Brent crude prices increased on 11 September, largely because Saudi Arabia closed its East-West oil pipeline over militia attacks on 10 September.
Advocacy and charitable groups opposed the RBA’s cash rate target hike on 29 September. Anglicare Sydney – a non-profit care organisation – has warned that the decision will hurt renters.
“This rate rise will be felt hardest by people already living on the edge because an unwelcome consequence of falling property prices is increasing rents,” Anglicare Sydney Chief Advocacy Officer Rob Stokes said.
“The banks pass on rate rises. Landlords pass on higher costs. [And] developers pass up new housing opportunities,” Stokes added.
The Australian Council of Trade Unions (ACTU) has also accused the RBA of losing sight of its dual employment-inflation mandate.
“The Reserve Bank has been signalling it would abandon its dual employment mandate to fight inflation, and that is exactly the outcome it voted for today. We already have 723,000 unemployed in the country, and that number shouldn’t go any higher,” ACTU Secretary Melissa Donnelly said.
By Avinash Govind