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The Reserve Bank of Australia, (RBA) has increased the Country’s cash rate by half a percent to combat the rising inflation in its latest cash rate change. The increase was in line with most analyst’s expectations as the RBA continues to fight inflation and bring it back into the 2-3% range. The current forecast from the RBA suggests that CPI inflation will peak near 7.75% over 2022, before falling to 4% during 2023, and then settling at 3% in 2024.
A key source of concern for the RBA was and continues to be the current spending habits of Australian households. Importantly, as the cost of goods has risen due to inflation, pressure has built on household budgets and their spending habits. This has been caused by both the supply chain issues and the increased cash rate. Furthermore, consumer confidence has fallen, and “housing prices are declining after the large increases in recent years.” This shows how interest rate hikes are impacting the lives of Australians and their spending habits.
Another important factor at play is the tightening of the job market. The unemployment rate dropped in June to 3.5%, the lowest rate in 50 years, and job vacancies and job advertisements continue to be at high levels. However, the bank does not expect to be able to hold these levels and predict the rate of unemployment will reach 4% by the end of 2024 as a result of the current slowing economic growth.
In response to the announcement, the ASX200 responded positively as investors saw the announcement as bullish, shooting up 0.38% in the 30 minutes after the announcement. Conversely, the AUDUSD dropped back below $0.70 dropping to $0.6970 in the 30 minutes immediately after the announcement.
The RBA will later this week further update the market with its monetary policy statement which will provide further clarity on its decision-making and the current sentiment.
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