Australia's economy gains momentum by confirming imminent rate hikes

07 September 2022 306
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Australia's economy has advanced, highlighting the strong performance noted by the Reserve Bank (RBA) after a series of interest rate hikes.

Compared to the first quarter, the $2.2 trillion ($1.5 trillion) economy grew 0.9%, supported by household spending and strong export prices, government data showed on Wednesday. That pushed growth to 3.6% from a year earlier, well above the pre-pandemic average of about 2%.

The data confirms the RBA’s hawkish approach to curbing inflation, which hiked half a percent on Tuesday, in order to push the interest rate to 2.35%. Policymakers expect Australians to continue spending for finance consumption in the face of growing prices and borrowing costs.

RBA tightens policy as unemployment rate declines, as well as inflation accelerates.

"These GDP figures confirm an economic demand to remain strong," said Callam Pickering, an economist at global jobs portal Indeed Inc. "Households are pumping record amounts, contributing to the supply-demand imbalance that, in turn, requires monetary tightening."

Policymakers expect GDP growth to slow next year to less than 2%. The reason is quite simple: higher interest rates affect demand. A key pillar is a limited labor market, with unemployment near a 50-year low of 3.4%, which is forecasted to fall in the coming months.

RBA governor Philip Lowe has raised rates by 2.25 percentage points since the beginning of the tightening cycle in May. Borrowing costs at that period hit a record low of 0.1%. So, the primary focus is to combat the most rapid inflation since the early 1990s.

Capital markets are looking for Australia's rate to hit 3.2% by the year-end. A peak of 3.75% is expected in 2023.

Economists predict Lowe will soon slow the rate hikes’ pace to a quarter point after four consecutive half-point surges. The governor is about to give a speech on Thursday titled "Inflation and Monetary Policy Fundamentals”. RBA monitors expect some hints about prospective policy changes.

This content is for informational purposes only and is not intended to be investing advice.

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