Australia hikes rates by half-point for third straight month to cool prices

AUSTRALIA'S central bank raised interest rates by a half-percentage point for a third consecutive month and gave itself wriggle room to change path if the economic outlook deteriorates.

The Reserve Bank (RBA) on Tuesday (Aug 2) increased its cash rate to 1.85 per cent - the highest level in more than 6 years - in a move that was predicted by all but 2 of 30 economists surveyed by Bloomberg.

"The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path," governor Philip Lowe said in a statement. "The size and timing of future interest rate increases will be guided by the incoming data."

Australia's currency dropped back below 70 US cents after the decision, sliding as much as 0.5 per cent to 69.86 US cents. Three-year government yields fell to 2.64 per cent, from as high as 2.73 per cent earlier on Tuesday.

The RBA is rapidly tightening policy, having now raised by 175 basis points since May, joining global counterparts from Washington to Wellington in trying to prevent consumer prices spiralling out of control. Headline inflation in Australia last quarter was running at twice the top end of the central bank's 2-3 per cent target.

The RBA provided some forecasts from its quarterly update due to be released on Friday. It sees:

• Inflation around 7.75 per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024
• GDP growth of 3.25 per cent over 2022 and 1.75 per cent in each of the following 2 years
• The central forecast is for unemployment to be around 4 per cent at the end of 2024

Lowe is confident the economy can cope with the sharpest tightening cycle in a generation as households remain cashed up from pandemic-era stimulus and unemployment is at a 48-year low of 3.5 per cent.

"How household spending holds up against a backdrop of higher inflation and falling house prices - the negative wealth effect - versus savings and wealth buffers" will be crucial to "how high and fast the cash rate rises", said Eleanor Creagh, senior economist at PropTrack.

"This dynamic will also be a key source of uncertainty for the housing market and the pace and depth of price falls," she added.

SEE ALSO

Australia's retail sales cool as rising rates, prices take toll

Australia cuts GDP growth outlook on inflation, higher rates

Reserve Bank of Australia sees more rate rises, welcomes government review

Higher rates feed straight through to Australian borrowers, most of whom are on variable-rate mortgages. The RBA has signalled it's trying to get the cash rate to around 2.5 per cent, or a neutral level, while money markets are pricing in 3.1 per cent by the end of the year. BLOOMBERG