Persistent underlying inflation strengthens the case for a September interest rate hike
The Melbourne Institute of Applied Economic and Social Research expects the Reserve Bank of Australia’s Monetary Policy Board to increase the policy interest rate to 4.6% on Tuesday, 29 September.
Associate Professor Viet Nguyen said “While there are signs that the Bank’s hikes earlier this year are working through the economy, domestic activity appears a little stronger than expected and underlying inflation remains persistently above the target band.”
“As such, one rate hike now is probably prudent to bring underlying inflation back into the Bank’s target within a reasonable timeframe. The next few months will provide the Bank with more data to assess whether further tightening is necessary to achieve its inflation target.”
“On a cautious note, strong investment in data centres driven by the AI boom, alongside consumer discretionary spending on solar panels, batteries, and EVs in response to rising energy costs, has skewed aggregate statistics—likely making economic activity appear stronger than expected.”
“Mortgage holders will continue to feel the brunt of interest rate hikes, while widespread consumer pessimism is being driven by the rising cost of living and uncertain international conditions. Increasingly cautious Australian consumers are growing their precautionary savings, pushing cash deposits to an all-time high.”
“Building resilience into our economy by improving productivity is key to safeguarding our prosperity against international headwinds, such as the current energy crisis. Our current productivity stagnation makes the task of economic management harder and leaves us more vulnerable to adverse foreign developments,” A/ Prof Nguyen said.
Associate Professor Viet Nguyen is available for interview.