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Mixed response to RBA rate rise

There has been a mixed response from employer and industry groups to the Reserve Bank’s rate rise on Tuesday (5 July).

Mixed response to RBA rate rise
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While Australia’s largest business group, the Australian Chamber of Commerce and Industry said the rise was right to “front-load” the rate rise, the Australian Industry Group said the rise would compound pressures on the sector.

The Reserve Bank continued the normalisation of monetary conditions with a third increase in the cash rate in as many months, lifting the cash rate target to 1.35 per cent. The increase reflects multiple and exacerbating stressors facing the Australian economy.

“The Reserve Bank is right to front-load rate rises given the recent rapid acceleration of inflationary pressures across the Australian economy,” ACCI chief executive Andrew McKellar said.

“The process of increasing interest rates will trigger some pain as consumers and businesses face higher loan repayments. However, a failure to do so would only risk embedding high inflation, forcing the Reserve Bank to take more drastic action.

“With businesses already struggling with soaring energy costs, congested supply chains and staff shortages, they cannot afford for inflation to become entrenched.

“The fundamentals of the Australian economy are solid. Heightened consumer demand, ultra-low unemployment, robust household budgets and strong export income mean that the Australian economy is sufficiently resilient to withstand tougher monetary policy.

“It must be remembered that inflationary pressures are as much driven by global supply chain constraints as they are by excess aggregate demand. Persistent disruption in China and ongoing geopolitical tensions in Europe have exacerbated price increases and cannot be ignored.

“Elevated interest rates threaten to further derail business investment which has fallen to anaemic levels in the past decade. The federal government must present a longer-term ambition to boost business investment that drives higher productivity, higher wages, and higher growth.”

Meanwhile, Australian Industry Group chief executive Innes Willox said if the RBA raises rates too rapidly it could have devastating consequences for business and industry.

While interest rate increases are an orthodox response to rising inflation, if we raise rates too rapidly it could crunch business and consumer confidence, at a time when businesses are struggling with large wage increases, [labour] and skills shortages and rising energy costs,” he said.

“The clear indication is that this rate rise may be far from the last but the impacts on demand and confidence need to be front of mind as future decisions are made. 
 
This emphasises the importance of addressing supply constraints across the Australian economy. Productivity raising reforms and resuming skilled migration are essential in this inflationary environment.
 
It is also critical that the recent large increase in award wages does not flow more broadly into wages and add to inflationary pressures that lead to even higher interest rates.

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