Australia’s central bank increased its cash rate by 50 bps on Tuesday, marking a 175-basis point increase in three months and the sharpest tightening phase since 1994.

Today’s statement also revised the central bank's forecast for CPI inflation from seven per cent in July to around 7¾ percent over 2022. Looking ahead, the RBA expects inflation to be a little above four percent over 2023 and around three per cent over 2024.

Inflation in Australia

Australia's inflation rate climbed from 5.1% in the first quarter to 6.1% in the second quarter of 2022. When compared with market forecasts of 6.2%, this was the highest print increase since Q2, 2001 and stems from the increase in food, fuel and dwellings.

Comapred to the first quarter, consumer prices went up 1.8% in the second hence being the second highest figure increase since the introduction of GST. The Core CPI, which the central bank prefers as an inflation indicator, rose 4.9% year-on-year, the fastest pace since 2003, far exceeding the RBA’s two to three percent target.

Despite the steep rate hikes and measures taken by the RBA, inflation in Australia is yet to be under control.

What is the interest rate outlook?

According to the RBA's statement, 'The Board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path.' In other words, the interest rate is likely to keep increasing but there are more mixed elements to take into consideration as the decision is not set in stone.

Last week in a major economic statement to parliament, Australia Treasurer Jim Chalmers warned that the local economy is forecast to slow with the economic growth being cut down by half a percent each year for the next three years.

The warning is poised to leave the RBA in an even more complicated situation to balance between the inflation pressure and the cloudy outlook of the economy.

Up to this week, the market predicts the interest rate will move as high as three percent by December and peak at 3.3% by March 2023.