There seemed to be a glimmer of hope for financially strained Australians, but all indications now point to a significant downturn.
When the Reserve Bank of Australia (RBA) decided to keep interest rates unchanged in April after 10 consecutive meetings, many believed that rate hikes were behind us and that a sluggish domestic economy would make the RBA exercise caution.
Given the RBA’s historical emphasis on economic growth and its readiness to reduce interest rates to support various sectors during the past decade, this perspective had a reasonable basis in precedent. However, it turned out to be insufficient in maintaining the status quo, as interest rates increased by 25 basis points on May 2. The RBA’s accompanying statement hinted at the possibility of additional rate hikes, cautioning, “To ensure that inflation returns to the target within a reasonable timeframe, some further tightening of monetary policy may be necessary.”
Considering the misguided predictions by the market and most economists regarding the trajectory of interest rates, it is worth examining the factors that influenced the RBA’s decision to continue tightening monetary policy and the potential for more rate hikes in the coming months.
The RBA made it unequivocally clear in their statement accompanying the recent rate hike that additional increases are indeed on the table. Although the current elevated levels of uncertainty in the global economy and financial system complicate matters considerably, they may not be sufficient to warrant a permanent pause from the RBA.
Given the aforementioned concerns regarding domestic inflation and the potential vulnerability to currency depreciation, the RBA may not be done with raising interest rates. If the global economy continues to hold up reasonably well, there is a possibility of further rate hikes in the future.
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