The Reserve Bank of Australia (RBA) is likely to raise interest rates on Melbourne Cup Day, despite not needing to, in order to maintain credibility and address inflation concerns. RBA Governor Michele Bullock has emphasized the importance of taming inflation in a timely manner. However, recent inflation figures exceeded the RBA's forecasts, casting doubt on the bank's plan to gradually bring inflation back to its target range by 2025. The RBA is now facing a credibility test and may need to follow through on its threat to increase rates. The theory suggests that with inflation still higher than interest rates, monetary policy is not tight enough. Inflation has been gradually decreasing since its peak in December 2020, but supply shortages and shocks complicate the situation. Higher interest rates could slow down demand and balance supply, but there is a risk of slowing the economy too much. The property and employment markets also play a role, as higher rates historically lead to a property downturn and potential layoffs. While the US Federal Reserve has shifted its stance on interest rates, with expectations of rates remaining on hold, there are increasing calls in Australia to raise rates on Melbourne Cup Day and before Christmas. The decision has become political, with accusations of pressure being exerted on the independent central bank. Market rates, including mortgage and loan rates, ultimately determine the impact on individuals and businesses. Australian 10-year bond rates have surpassed US interest rates in the past week. [e47975d1]
The RBA's cautious approach is attributed to high levels of household debt and the need to balance inflation and household mortgage stress. The RBA began its tightening cycle later than other central banks, partly due to criticism it faced prior to the pandemic. Economists suggest that more rate hikes may be necessary to manage demand and slow down the economy. However, the effects of previous rate rises have been mitigated by state government spending on infrastructure, record migrant flows, and a near-record terms of trade. The RBA's decision to raise rates is expected to be influenced by persistent inflationary pressure and tentative evidence of increased household spending growth. [67c6b733]