Australia: RBA raised the OCR by 50 bps in July – UOB

Economist at UOB Group Lee Sue Ann reviews the latest RBA event on July 5.

Key Takeaways

“The Reserve Bank of Australia (RBA), at its meeting on Tue (5 Jul), decided to increase the official cash rate (OCR) target by 50bps to 1.35%. It also increased the interest rate on Exchange Settlement balances by 50bps to 1.25%.”

“In light of the RBA’s persistent reference to ensure that inflation in Australia returns to target over time; we now think the RBA is open to a third 50bps rise in Aug. We then look for a further 25bps increase in Nov to take the OCR to 2.10% by year-end. In 2023, we are looking for a 25bps increase in Feb and a 15bps increase in May. This should take the OCR to 2.50%, with a pause thereafter, and our end-2023 forecast unchanged at 2.50%.”

“Financial markets have priced in aggressive tightening, with the OCR rising above 3.5% by 2Q23. We think the Australian economy does not require such a rapid tightening, and our view is also based on several uncertainties flagged by the RBA. The next RBA meeting is on 2 Aug, and 2Q22 CPI data, to be published on 27 Jul, will be a crucial update a little less than a week prior to that meeting.”