Australia’s Central Bank Says Interest Rates Too Low

The Reserve Bank of Australia (RBA) has said that interest rates will need to be raised much higher to calm red-hot inflation, despite recent rate hikes.

The central bank sees the prevailing benchmark rate of 1.35% as being “well below” the ideal rate that is neither expansionary nor contractionary. RBA Governor Philip Lowe has previously said the ideal rate sits at roughly 2.5%.

The RBA hiked interest rates by 0.5% at its July 5 meeting, the third hike in the last three months. Following the last policy meeting, unemployment fell sharply to an almost 50-year low of 3.5% as Australians found jobs easy to obtain.

With unemployment so low, some commentators expect the RBA to raise interest rates by 0.75% in August before lifting it to 3.25% by the end of 2022.

What does this mean for me? 

With fresh inflation statistics due in the next week expected to reveal that prices climbed by more than 6% on an annual basis, the most recent RBA meeting minutes reveal that the central bank is concerned the country’s heavily indebted households will not be able to cope with rising borrowing costs and inflation.

The latest monetary policy moves in Australia reveal an uncanny similarity to the patterns shown in so many developed economies, even if the country is slightly behind the curve. Diversified traders can expect even this safe-haven economy to continue to battle with inflation.