The Reserve Bank of Australia raises its cash rate target by +50 bps to 2.35% as expected and isn't seeing any reason to expect CPI inflation lower than 7.75% in 2022, so the pressure remains to get it back to 3% and within their policy range

As expected the Reserve Bank of Australia raised its cash rate target by 50 basis points to 2.35%.

They haven't changed their view of where CPI inflation will rise to in 2022 at 7.75% which is up from the June rate of 6.1%. They don't see it receding back into their policy target range until 2024. That probably means more rate rises are ahead to ensure that happens.

It is also clear they regard the situation as fragile and "keeping the economy on an even keel" is a clear goal. Higher interest rates eat into household budgets sharply in Australia and with household debt high, higher rates will threaten that "even keel". 

On the news, the Australian dollar was briefly volatile, but then quickly reverted to the general level it was prior to the announcement. Bond market yields rose two to four basis points with only a very minor steepening.

From here, a lot will depend on how US markets assess the direction. It seems unlikely however this +50 bps rise will change anything priced in. Markets had priced in +46 bps of today's +50 bps rise, so a small adjustment was to be expected. Those same markets have priced in only +37 bps for the October 4 review and that seems light in the circumstances.

The NZ dollar rose slightly after the RBA statement.

Here is their official Statement:

At its meeting today, the Board decided to increase the cash rate target by 50 basis points to 2.35 per cent. It also increased the interest rate on Exchange Settlement balances by 50 basis points to 2.25 per cent.

The Board is committed to returning inflation to the 2–3 per cent range over time. It is seeking to do this while keeping the economy on an even keel. The path to achieving this balance is a narrow one and clouded in uncertainty, not least because of global developments. The outlook for global economic growth has deteriorated due to pressures on real incomes from high inflation, the tightening of monetary policy in most countries, Russia's invasion of Ukraine, and the COVID containment measures and other policy challenges in China.

Inflation in Australia is the highest it has been since the early 1990s and is expected to increase further over the months ahead. Global factors explain much of the increase in inflation, but domestic factors are also playing a role. There are widespread upward pressures on prices from strong demand, a tight labour market and capacity constraints in some sectors of the economy.

Inflation is expected to peak later this year and then decline back towards the 2–3 per cent range. The expected moderation in inflation reflects the ongoing resolution of global supply-side problems, recent declines in some commodity prices and the impact of rising interest rates. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. The Bank's central forecast is for CPI inflation to be around 7¾ per cent over 2022, a little above 4 per cent over 2023 and around 3 per cent over 2024.

The Australian economy is continuing to grow solidly and national income is being boosted by a record level of the terms of trade. The labour market is very tight and many firms are having difficulty hiring workers. The unemployment rate declined further in July to 3.4 per cent, the lowest rate in almost 50 years. Job vacancies and job ads are both at very high levels, suggesting a further decline in the unemployment rate over the months ahead. Beyond that, some increase in the unemployment rate is expected as economic growth slows.

Wages growth has picked up from the low rates of recent years and there are some pockets where labour costs are increasing briskly. Given the tight labour market and the upstream price pressures, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

An important source of uncertainty continues to be the behaviour of household spending. Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments. Consumer confidence has also fallen and housing prices are declining in most markets after the earlier large increases. Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages. Many households have also built up large financial buffers and the saving rate remains higher than it was before the pandemic. The Board will be paying close attention to how these various factors balance out as it assesses the appropriate setting of monetary policy.

The further increase in interest rates today will help bring inflation back to target and create a more sustainable balance of demand and supply in the Australian economy. Price stability is a prerequisite for a strong economy and a sustained period of full employment. The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path. The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.