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RBA Haemorrhages The Market

In a move that surprised almost everyone, the Reserve Bank of Australia (RBA) increased its benchmark interest rate by 0.50% today to 0.85%.

In May, the RBA raised the official interest rate for the first time in a decade. The bank boosted the cash rate from the all-time low 0.10% to 0.35%. This was primarily done to temper fast-rising inflation, which the most recent figures state is at 5.7%.

As this hike was a surprise to most of the high end of analyst forecasts, including all of the estimates from the big four banks, and most economists having predicted a 0.25% or 0.40% increase. By the end of the trading day, the ASX 200 was down 1.53% for the day at 7095.70 points.

Commenting on the RBA’s decision to lift the interest rate again this month, Lowe said that while inflation in Australia was lower than many other nations are experiencing it is still “higher than earlier expected”.

The dramatic increases in energy prices have also caused inflation figures to be higher than expected.

He added that domestic factors were conspiring to drive costs up too “with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices”.

Lowe called the Australian economy “resilient”, posting 0.8% growth in the March quarter and increasing 3.3% over the year. When commenting on the labour market, he said the current 3.9% unemployment rate was the lowest level in 50 years.

Lowe concluded:

“Today’s increase in interest rates by the Board is a further step in the withdrawal of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The resilience of the economy and the higher inflation mean that this extraordinary support is no longer needed.”

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