UPDATE: The RBA has announced a 50 basis point increase to the cash rate in July.
In a speech last week, Reserve Bank Governor Dr Philip Lowe detailed there is no pre-set path that determines interest rate increases, however Aussies should be preparing for more to come.
"The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation," Dr Lowe said.
"As we make that assessment each month, the Board will be paying close attention to developments in the global economy, the evolution of labour costs and how household spending is responding to higher interest rates.
"I expect that next month we’ll be having the same discussion at our board meeting: 25 or 50 [basis point increase]."
ANZ Head of Australian Economics David Plank said the lags between policy and the economy means that the May labour market data were a reflection of policy settings prior to the first rate hike.
"The RBA won’t know for some time how the moves since then are impacting the economy," Mr Plank said.
Economists forecast 50 basis point increase
Mr Plank believes the RBA is conscious that it has communicated quite poorly at times, however has aimed to clear that up recently.
"While Lowe did not explicitly rule out going by more than 50 basis points in July and did say 'other things can happen', he did come back to saying that 25 or 50 was the likely choice," he said.
"So, we see the RBA tightening by 50 basis points at its meeting on 5 July taking the cash rate target to 1.35%."
Westpac Chief Economist Bill Evans echoes this sentiment noting that a 50 basis point increase in the cash rate at the July 5 Board meeting seems highly likely.
"Now that the Board has clarified its position on the best approach to policy, it would seem quite clear that with the cash rate at only 0.85% a second decisive move of 50 basis points is the appropriate policy," Mr Evans said.
"The decision in June to move by 50 points indicates that while rates are stimulatory with rising inflation pressures and a 48 year low in the unemployment rate, the better policy is to move decisively and signalling clearly that the Board is fully committed to returning inflation to its target range in due course.
"We expect the Board will decide to lift the cash rate by 50 basis points from 0.85% to 1.35%."
AMP Chief Economist Shane Oliver notes having the lowest unemployment rate in 48 years is good news – but the comparison to 1974 is not necessarily good given the stagflation that followed.
"The 1970s experience does highlight the need for the RBA to act quickly to make sure inflation expectations do not rise significantly because if they do it will be much harder to get inflation back down," Mr Oliver said.
"And it now appears that they are well aware of that lesson."
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Harry O'Sullivan
Denise Raward
Dominic Beattie
Staff Writers
