Bank of Australia Confirms Hawkish Stance in July Rate Decision

July 05, 2022 09:46

The Reserve Bank of Australia hiked its key interest rate from 0.85 percent to 1.35 percent in July as inflation ballooned prices in the world’s 12th largest economy.

The RBA’s hawkish move was expected. The central bank had to move fast to suppress inflation, not least because one of Australia’s largest economic sectors is mining. As raw material costs inflate rapidly, economic growth could be eroded because the country’s exports may become uncompetitive.

Australia’s economy depends in part on its largest trading partner, China, which has a zero-tolerance COVID-19 policy, forcing it into frequent lockdowns and impacting on industrial production. Although Australia’s GDP growth was resilient at 3.3 percent in the first quarter, lockdowns in China, higher raw material prices and monetary tightening may slow down the economy.

Interest rate environment

Over the last three months, we’ve seen monetary tightening in many economies, with the exception of Japan and China, which remain dovish.

What are the key interest rate levels in the world’s most hawkish economies?

Country Interest Rate Guidance % Inflation Rate %
Australia 1.35 5.1
US 1.5 - 1.75 8.6
UK 1.25 9.1

Monetary divergence is a clear theme when we compare these countries with the world’s most dovish monetary policy makers:

Country Interest Rate Guidance % Inflation Rate %
China 0.35 2.10
Japan 0.10 2.5
EU 0 8.8

The ECB is expected to hike its key interest rate guidance later this month, which may support the EUR. The Eurozone’s single currency has been weak against the USD since March, when the Federal Reserve began tightening its monetary policy.

Other news to watch this week are EU Retail Sales figures due out tomorrow (Wednesday, July 6) and the NFP job report due out this Friday, July 8. Both benchmarks can be market moving for the EUR and USD respectively, depending on the results.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.