In a speech to the American Chamber of Commerce in Australia (AmCham), RBA Governor Philip Lowe explained the reasoning behind the recent cash rate increases, citing cost pressures on business and a growing inflation forecast.
“The increase in the cash rate in May followed the higher-than-expected CPI outcome in the March quarter and evidence from business surveys and our own liaison that growth in labour costs had picked up and would continue to do so in the months ahead. In June, we decided to make a bigger, 50 basis points, adjustment on the basis of the additional information suggesting a further upward revision to an already high inflation forecast. The board also gave consideration to the fact that the level of interest rates was still very low,” he said.
This is in line with the NAB’s Q1 SME Business Survey, which was released ahead of the first interest rate hike in May. NAB CEO Alan Oster said, “As we have seen in all our business surveys, SMEs are facing very elevated cost pressures and this is translating to price increases, although margins remain under pressure. Labour and materials availability continue to be a constraint for a large share of firms.”
Mr Lowe also warned that inflation would continue to rise beyond the earlier RBA forecast of a 6% peak.
“Since early May, petrol prices have risen further due to global developments and the outlooks for retail electricity and gas prices have been revised higher due to pressures on capacity in that sector. As a result, we are now expecting inflation to peak at around 7 per cent in the December quarter. Following this, by early next year, we expect that inflation will begin to decline,” he said.