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At its July monetary policy meeting the Reserve Bank increased the cash rate by 50bps - it now sits at 1.35%.
This marks the third month in a row of RBA rate increases, and the second month in a row of an outsized 50 basis point increase.
Reserve Bank Governor Dr Philip Lowe said there are a lot of uncertainties in the domestic and international economies.
"One source of ongoing uncertainty about the economic outlook is the behaviour of household spending. The recent spending data have been positive, although household budgets are under pressure from higher prices and higher interest rates," Dr Lowe said.
"Housing prices have also declined in some markets over recent months after the large increases of recent years. The household saving rate remains higher than it was before the pandemic and many households have built up large financial buffers and are benefiting from stronger income growth.
"The Board will be paying close attention to these various influences on household spending as it assesses the appropriate setting of monetary policy.
The Board will also be paying close attention to the global outlook, which remains clouded by the war in Ukraine and its effect on the prices for energy and agricultural commodities.
"Real household incomes are under pressure in many economies and financial conditions are tightening, as central banks increase interest rates. There are also ongoing uncertainties related to COVID, especially in China."
Dr Lowe and the RBA expect inflation to be persistently high in justification for the 50 basis point increase - the Governor expects inflation to be as high as 7% by year's end.
A 50 basis point increase was largely consensus among Australia's leading economists, with only a few outliers forecasting smaller or larger movements to make the cash rate a more normalised figure.
PropTrack senior economist Eleanor Creagh said the RBA's aim is to front load the interest rate hikes.
"This is a rapid policy tightening and whilst high household debt and weak sentiment is a risk, these factors are offset by the tight labour market, promoting a degree of confidence and job security and hopefully, in turn, stronger wages growth. In addition, households are sitting on large savings buffers," Ms Creagh said.
Inflation would have been more of a concern had the RBA increased the cash rate by only 25 basis points, according to CMC Markets analyst Azeem Sheriff.
"The next two CPI [inflation] prints are scheduled to be released on 27th July and 26th October 2022 for quarter-two and quarter-three respectively and therefore will significantly dictate whether the following months will carry a 25 basis point or 50 basis point hike," Mr Sheriff said.
"I don’t believe there is sufficient justification to allow a 75bps [like in the United States] hike unless inflation just skyrockets."
"RBA increases cash rate by 50 basis points for July" was originally published on Savings.com.au and was republished with permission.
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