The Reserve Bank of Australia (RBA) surprised the market when it raised the benchmark rate by 0.25%. Leading market experts and economists were expecting a 0.5% rise. The RBA has increased benchmark rates from 0.10% in May 2022 to 2.60% in October 2022 in an attempt to control inflation.
Inflation, interest rates and unemployment are all linked together. Inflation is an increase in the price of goods, services and labour that occurs when there are more people demanding money, goods and services while not having adequate supply in the market. When inflation is greater than expected, it can cause consumers to spend more on everyday goods and debt repayments, and places pressure on savings.
When interest rates are lowered, it is often seen as an attempt to jump start an economy that is stalling as a reflection on the economy is not growing quickly enough and/or inflation is too low. The RBA takes the opposite levers when the economy begins to run too hot. This is because fears of hyperinflation kicks in. The RBA aims to keep Australia's target consumer price index (CPI), also referred to as inflation, between 2–3% on average. The current Australian rate is sitting at 6.1% (end of June 2022 quarter) year on year. This is much higher than the RBA’s target Interest rate range, hence the rise in interest rates in the RBA’s desire to bring this number back to the 2-3% average. The Reserve Bank governor Philip Lowe cited "Today's further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down. The Board expects to increase interest rates further over the period ahead." Australia suffers supply shortages throughout various sectors with some well documented examples including building supplies, labour and logistics. The RBA hopes that demand for goods and services lower slightly providing a chance for the supply side to catch up.
The RBA also examines unemployment rates as a key control measure. Australia’s unemployment rates remain at historic lows at 3.5% in August 2022. The unemployment rate is defined as the percentage of the total workforce that is unemployed and actively seeking employment during the previous month. A low unemployment rate is considered healthy, and although this may not be a major consideration when raising interest rates, it would be a significant consideration when slashing rates.
A hard landing is when the RBA and Government attempt to cool the economy via monetary and fiscal measures, but they push the economy too far resulting in a recession. Historically, when inflation was left to run rampant without an adequate control measurement put in place, it sent the economy into a devastating spiral. To avoid this, the RBA would be cautious in raising rates too fast, sending the Australian economy into a recession.
This will be dependant on various data points that the Reserve bank looks at when making a decision. Key dates and data points to look out for include: Australian Unemployment Rate, due to be released on 20th of October but the biggest clue will come from the quarterly Australian CPI data which will be released on the 24th of October, especially given that controlling inflation is the bank's biggest priority. The RBA will be hopeful that the previous month's rate hikes have brought key inflation numbers into line that and they do not need to raise rates so aggressively.
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