By Jordan Smith, Policy Advisor
The RBA exceeded expectations this week by increasing the cash rate by 50 basis points to 0.85%. This is the second rise in the current cycle of monetary policy tightening. The magnitude of Tuesday’s decision took many analysts by surprise with many forecasting the increase to fall between 25 and 40 basis points.
The RBA intends these interest rate increases to put downward pressure on inflation by slowing down economic activity. However this does take some time to have an impact so the upcoming inflation data may still be high despite this tightening by the RBA.
Expect to see continued rate increases up until the year with many expecting the cash rate to hit at least 2 per cent by the end of the year.
The RBA will keep a keen eye to future inflation, labour force and wage force data releases in determining the size and timing of future increases. Inflation data from the ABS for the June is expected to be released 27 July.
Over the next few months expect to see consumer and business spending begin to be impacted as loan repayments increase. As interest rates begin to increase, consumers often spend less on products and services and tend to borrow less money as well.
Interest rate hikes can impact profit, savings and whether or not a business will have access to financing.
Moreover, expect the housing market begin to lose some momentum. We have already seen the eastern seaboard lose some of its heat, but Adelaide has continued to trend upwards.
The RBA board meets the first Tuesday of every month the next meeting is set for 5 July.
