The Reserve Bank of Australia (RBA) is expected to increase the cash rate from between 25 to 40 basis points today, adding to already mounting financial pressure on Australian households and small businesses.
Ahead of federal elections last month, the RBA had lifted interest rates from historic lows to 0.35 per cent. At the time, RBA Governor Phil Lowe had already flagged the likelihood of further increases.
Any rate rise from the RBA’s meeting today would be the first back-to-back monthly increase in 12 years.
“The data continues to confirm that inflationary pressures are building, and that the supply disruptions globally are at least semi-permanent,” explained Sarah Hunter, senior economist at KPMG. “Furthermore, the RBA Board signalled in May that they expect to progress with rate rises from here. Together, this suggests another 0.25 per cent increase in the cash rate.”
Households and businesses are currently facing massive bills from all sides. The prices of grocery staples like fruits and vegetables, oils, and bread continue to rise from supply chain issues even as massive power price rises are expected in July.
Australians are also bracing for an increase in fuel prices after the government’s fuel tax relief ends in September.
According to the Australian Bureau of Statistics (ABS), inflation grew 5.1 per cent in the 12 months to March.
“The RBA’s task is as much about managing expectations as it is taking heat out of the buoyant economy,” said Harry Murphy Cruise, Moody’s Analytics.
“Short-term inflation expectations are rising, and the RBA needs to tame those gains. The May rate hike confirms that the RBA is acting on rising inflationary pressures even if much of the price rises are outside the RBA’s sphere of influence, notably food and energy.”
The economist expects a 40 basis point hike today, bringing the cash rate to 0.75 per cent.
“The speed of further interest rate normalisation will rely on how well businesses and families react to these higher borrowing costs, as well as the pace of real wage gains,” he added.
While a rise in interest rates seems inevitable, the RBA faces the challenge of raising rates enough to tackle inflation without stalling economic growth. On the Today Show earlier this morning, Treasurer Jim Chalmers said Australians “do need to brace” for the rise.
All eyes are on the RBA’s announcement following its meeting at 2:30 PM this afternoon.