The Reserve Bank revealed this afternoon that the board had decided to boost the cash rate by 0.25% for the second month in a row, “to contain and reduce inflation over the medium term”.
This is the highest the interest rate has been since 1996.
Reflecting on the decision, the RBA Governor Glenn Stevens said in a statement:
“Having weighed both the international and domestic information available, the board concluded that a further tightening in monetary policy was needed to secure an inflation rate of 2-3% over time.
“As a result of this and earlier actions, and rise in borrowing costs which are occurring independently of changes in the cash rate, the overall tightening in financial conditions since the middle of 2007 is substantial.”
The RBA governor would be pleased with the data released today by the Australian Bureau of Statistics (ABS), which showed retail spending was flat in January.
The ABS said retail trade growth was flat in January at a seasonally adjusted $20.1 billion, after growing by a revised 0.4% in December and an increase of 0.8% in November 2007.
This demonstrates that past interest rate increases are having the desired effect: to curb inflationary spending habits.
But rising petrol prices, falling consumer confidence and the increase in stockmarket volatility in late January would have also played a part in knocking the growth out of retail sales.
“There is tentative evidence that some moderation in household demand is beginning to occur, with business and consumer sentiment softer recently, and household credit demand slowing somewhat,” Stevens said.
The governor said inflation is likely to remain relatively high in the short term, and will probably rise further in year-ended terms, before moderating next year in response to slower growth in demand.
The rise today will end the analyses, debates and discussions about the interest rate rises for a while – or at least another month when the bank meets again, on 1 April. Rates won’t likely rise then, so the May meeting will be interesting as it will have the April 23 release of the March quarter’s Consumer Price Index to digest.
In the meantime, the big banks will promptly follow the RBA by raising their variable home loan interest rates. The question is whether they will try and recoup higher funding costs by adding a margin to the 0.25% from the RBA.
