RBA eyes cash rate over 2.5%

The Reserve Bank’s board today raised the cash rate by 0.25% from 0.1% to 0.35%, the first interest rise  in 11 years.

Governor Philip Lowe later blamed the “embarrassing” erroneous guidance for the previous no-rate-increase-until-2024 announcement, saying they were fed incorrect data and forecast by the government.

“We were told thousands of Australians would die from the pandemic, hospitals will be full, that we would have double-digit unemployment, perhaps 15% unemployment, that deep scarring would last for years, perhaps decades,” Lowe said at his press conference.

He hinted the RBA sees cash rate getting to between 1.50% and 1.75% by year-end, by 2.50% by the end of 2023, or potentially higher if data allow.

“I’ve got an open mind about that. If productivity growth is really strong, then I’d expect it to be higher than that,” he noted.

“As I said before, the forecasts are predicated on the interest rate getting to 2.5%, and that leads to inflation coming back to 3%, but there are a lot of ifs”.

“Given the outlook for the economy and inflation, further normalisation of interest rates will be required. In making its decisions, the board will continue to be guided by the evidence on both inflation and the labour market. We will also continue to be flexible and responsive to changing circumstances.”

According to him, homeowners are  well prepared to survive the rising rate cycle.

“We all knew interest rates couldn’t stay at this current level forever and many people have saved in advance of that and I think that’s very sensible behaviour.”