Surprise rate move is welcome news for Australia’s economy

A sensible slowdown in Reserve Bank interest rate rises means Australia may sail through the global economic storm better than most nations.

The Reserve Bank’s smaller-than-expected interest rate rise reduces the risk of Australia sliding into recession.

It also suggests that RBA governor Philip Lowe and his board believe we do not have to follow the US, Britain and Europe into a painful economic slowdown.

Australia’s inflation is not rising as fast as other countries, demand for our commodities remains strong, and rates could begin falling next year if the RBA gets inflation under control quickly.

However, it is walking a tightrope that could be shaken wildly by other factors including more energy price surges and cost-of-living increases, the Russia-Ukraine war intensifying, and the Aussie dollar continuing to slide.

RBA governor Philip Lowe says the economic outlook is uncertain. Picture: Monique Harmer

Financial markets reacted strongly to the rate announcement, with the stock market surging but the Aussie dollar dipping back below US65c. Compared with the US central bank’s 0.75 percentage point rise late last month, our 0.25 percentage point rise is puny, but in this case puny is good for borrowers and investors.

The increasing interest rate differential – the US Federal Reserve’s official rate is now 3-3.25 per cent compared with the RBA’s 2.6 per cent – makes holding Aussie dollars less attractive and risks fuelling more imported inflation. However, a recession here would be worse.

Several economists had warned that continuing the barrage of 0.5 percentage point rises would almost certainly plunge Australia into recession, largely because our households and businesses are more sensitive to interest rate movements than other countries.

We have a large proportion of variable rate home loans, whereas the US housing finance is mainly long-term fixed.

The RBA’s latest rise gives it breathing space to assess the impact of its 2.5 percentage points of rises since May, and more increases are coming – although we have probably seen the last super-sized 0.5 percentage point move for now.

“Further increases are likely to be required over the period ahead,” Dr Lowe’s statement says.

It also says the path to keep the economy “on an even keel” is clouded in uncertainty.

What is certain, however, is that the RBA’s restraint shown on Tuesday shows it doesn’t want to inflict unnecessary financial pain on Australians.