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Monday, October 3, 2022

RBA Is Set To Increase Cash Rate Target By 50 Basis Points To 1.85% As Inflation Expected To Peak

The increase in interest rates is the RB's effort to normalise monetary conditions in Australia; Interest rates have been required to bring inflation into control and balance the demand-supply dynamic in the economy

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AUSTRALIA: As per reports from the office of Philip Lowe, Governor of the Reserve Bank of Australia, the Board has decided to increase the cash rate target by 50 basis points to 1.85% as inflation is expected to peak between the 2-3% range. The RB is also attempting to keep the economy in balance by increasing the interest rate on Exchange Settlement balances by 50 basis points to 1.75%.

However, the certainty to control the economy and keep these inflated costs in check is shrouded in doubt and speculation. The outlook for economic growth is affected by several factors, including pressures on real income due to higher inflation, tightening of monetary policies in most countries, the Russia-Ukraine conflict and Chinese restrictions spurred by COVID-19.

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Inflation is at an all-time high since the early 1990s, bordering on the edges of 2-3%. Despite external factors, many internal factors also play a major role. There are pressures on prices from strong demand, a tight labour market and constraints of capacity in certain sectors of the economy. The floods this year are also simultaneously affecting prices.

According to the Board, a key source of uncertainty about the economy also emerges from household spending and consumption which is inadvertently affected by rising inflation and even higher interest rates. Real estate prices are declining, while more people are taking up a greater number of hours in the office.

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Savings have also increased, which reduces cash flow into the economy. The RB will consider all these factors as it attempts to map out a specific plan for formulating the monetary policy.

The increase in interest rates is the RB’s effort to normalise monetary conditions in Australia. Interest rates have been required to bring inflation under control and balance the demand-supply dynamic in the economy. The size and timing of future interest rates will be further evaluated as the Board keeps an eye on inflation and the labour market.

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ALSO READ: “Global Economy Teetering on Edge of Recession”: IMF Issues Warning

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