The Reserve Bank of Australia (RBA) has raised rates by 50 basis points, its third rate rise this year.
Rates now stood at 1.35%, up from 0.85% in June.
RBA governor, Philip Lowe, said the decision had been taken to raise rates due to high global inflation.
“Global inflation is high. It is being boosted by COVID-related disruptions to supply chains, the war in Ukraine and strong demand which is putting pressure on productive capacity. Monetary policy globally is responding to this higher inflation, although it will be some time yet before inflation returns to target in most countries,” he said.
Lowe said inflation in Australia was also high, but not as high as it was in many other countries.
“Global factors account for much of the increase in inflation in Australia, but domestic factors are also playing a role. Strong demand, a tight labour market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods are also affecting some prices.”
It was expected in the run-up to the decision that rates would be raised by 50bps as Lowe had previously stated that July’s meeting would be a choice between 25bps or 50bps rather than 75bps like the Federal Reserve.
GSFM investment strategist, Steve Miller, said: “A late start, and an overly conservative approach to the withdrawal of historically high levels on monetary stimulus, however, has put the RBA out of the realm of ‘first best’ solutions.
“Like a number of other central banks it finds itself searching a ‘least bad’ approach. Having potentially let the inflation genie out of the bottle, it is not an easy task to chart a course between vanquishing inflation without tipping the economy into recession.”
Paul Bloxham, chief economist for Australia and NZ at HSBC, said: “The RBA has shifted into full ‘inflation-fighting’ mode and − like many other central banks in the past few months − has done so quite abruptly.
“The RBA Governor, Phil Lowe, noted in a hawkish speech during the month that ‘Australians should be prepared for more interest rate increases’, that ‘the level of interest rates is still very low’ and that the RBA ‘is committed to doing what is necessary to ensure that inflation returns to the 2% to 3% target range’.”
Lowe has stated he expects inflation to peak at 7% before falling back at the end of the year while interest rates could reach as high as 2.5% by the end of 2022.
