The Reserve Bank of Australia (RBA) has kept the cash rate (or ‘interest rates’) unchanged at 4.1% for the month of July.
It comes after two consecutive months of rate rises.
RBA Governor Philip Lowe says inflation has “passed its peak”, but warned more rate rises may be required in future months.
What does it mean for the economy? Here’s a closer look.
The context
The RBA began to increase its cash rate in May of last year. The cash rate is what the RBA charges commercial banks for short-term loans and it flows through to other interest rates across the economy (so it’s often referred to as ‘increasing interest rates’).
The RBA is doing this to combat inflation (rising prices). Prices grew 5.6% from May 2022 to May 2023, well above the RBA’s desired inflation rate of 2-3%.
Why raise interest rates?
The RBA’s rationale is that higher interest rates make it more expensive to borrow, discouraging spending.
For example, a homeowner with higher monthly mortgage repayments might have to cut back spending elsewhere. Similarly, a business owner considering applying for a loan to expand their business might reconsider with a higher interest rate.
When there is less spending, there is less upwards pressure on prices.
When is it enough?
It can be difficult for the RBA to know when it has done ‘enough’ to cut inflation because it takes a while for the full effects of a higher rate to be felt.
For example, some homeowners have ‘fixed rate’ mortgages, where the rate they pay is frozen for months at a time.
These homeowners will only experience the effects of higher interest rates when their fixed term ends.
Is it working?
There are some signs inflation is starting to be contained. The most recent figure of 5.6% is below the peak of 7.3% reached at the end of 2022.
However, there are signs spending is still strong.
While many people have felt a squeeze on their budgets, others with more financial means have continued to spend at high levels.
Will jobs be lost?
One risk associated with rising interest rates is that people lose their jobs.
The RBA says it hopes it can control inflation without job losses, but has warned some job losses may be unavoidable.
So far, there has not been much change. The unemployment rate is at 3.5%, the lowest level in 50 years.
