Philip Lowe, the Reserve Bank of Australia's (RBA) governor, announced that the RBA would fight inflation with a 25-point increase in the cash rate target, a surprise move that has already increased the cost of borrowing.
The 25-basis-point increase in the cash rate has caught the market off guard, defying earlier projections that there would be a temporary pause in rate hikes. As a result of the RBA's decision, borrowing costs have surged to their highest level since April 2012. According to Trade Economics, this rate hike marked a total increase of 400 basis points since May 2022. The RBA's gradual approach to raising interest rates aims to normalize monetary policy and manage risks to the economy, the report stated.
"High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest and worsens income inequality," Lowe said in a release by RBA.
Lowe also emphasized the need to tighten monetary policy to achieve the target inflation range within a reasonable time frame, the release stated. He added that the RBA monitors global economic developments, household spending trends, inflation outlook and the labor market using a data-driven approach, which allows the central bank to make "informed decisions regarding future monetary policy adjustments," the release added.
Lowe's statement also underscored the importance of observing both external and domestic factors that influence the economy, he wrote.
Lowe acknowledged that inflation is high at 7% and will take time to return to the target range, especially to combat global inflation and prices. The expectation of continued inflation also poses the threat of further increases in prices and wages, Lowe said. More may be needed to keep prices down as global inflation and the target rate drop, Lowe added.