Read the article below and answer the following questions.

Reserve Bank hikes official interest rate by 50 basis points to 0.85% to curb inflation

Peter Hannam

Tue 7 Jun 2022

The Reserve Bank has announced the biggest single rise in the cash rate in 22 years as Australia's central bank tries to quash inflation before it gets out of control. The RBA board at its regular monthly meeting lifted its cash rate target 50 basis points to 0.85%. Economists were again surprised by the size of the move, having been mostly split between predicting a 25 or 40 point increase, according to Bloomberg.

The back-to-back monthly rate rises of a combined 75 basis points will add about $200 per month for a $500,000 loan compared with April, according to Tim Lawless, research director for property group CoreLogic. Westpac was the first of the big banks to pass on the rise. "From 21 June, Westpac will increase home loan variable interest rates by 0.50% per annum for new and existing customers," it said in a statement on Tuesday evening. Households and businesses are already bearing higher costs for everything from food to construction materials and energy. To this load will be added larger repayment costs for those on variable loans with the main commercial banks likely to pass on today's rate rise promptly.

"Inflation in Australia has increased significantly," said the RBA governor, Philip Lowe, in a statement. "While inflation is lower than in most other advanced economies, it is higher than earlier expected. "Inflation is expected to increase further, but then decline back towards the 2% to 3% range next year," Lowe said. "Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago."

The treasurer, Jim Chalmers, earlier on Tuesday said "it's going to be a difficult winter for a lot of people". "We have an incredibly difficult challenge of combinations," he said after the RBA move, adding a dig at the previous government. "High and rising inflation, rising interest rates, falling real wages at a time when our ability to respond to these challenges is constrained by the fact that the budget is absolutely heaving with Liberal debt." Chalmers will probably have to address regular increases in interest rates in the coming months as the RBA changes tack after keeping the cash rate at record low levels to support the economy through the Covid pandemic. The Aussie dollar rose against the US counterpart and stocks extended falls on the prospect of higher rates.

"The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead," Lowe said, as an indication of more rate rises to come. The RBA's medium-term goal is to have underlying inflation range between 2% and 3%, compared with a 3.7% pace in the March quarter that's expected to accelerate in the current quarter if not beyond. Power price increases of 10% or more will kick for many households and businesses from 1 July, a rise that will have knock-on effects.

The headline consumer price inflation rate was 5.1% for the March quarter, with automotive fuel up 35%, the most since Iraq's 1990 invasion of Kuwait. The current spike in energy prices has similarly been made worse by war after Russia invaded Ukraine in February. Covid-related interruptions to supply chains have also pushed up prices. "The RBA has pointed to a stronger outlook for energy prices compared to a month ago as the main protagonist for the outsized move," said Sean Langcake, the head of macroeconomic forecasting for BIS Oxford Economics. Despite the imported source of much of the inflation, the RBA sees the need to rein-in excessive demand to ensure expectations of further prices don't lead to a spiral of costs.

The RBA noted housing prices had declined in some markets over recent months but remain more than 25% higher than prior to the pandemic, providing a wealth effect that would support spending even as rates rise. The saving rate also remains higher then pre-Covid - although it fell in the March quarter - and many households had built up "large financial buffers" to help them cope with the higher debt repayment costs.

Concerns about higher borrowing costs have already taken some of the steam out of property markets, with "dwelling sales" down almost one-fifth in the three months to the end of May. Among the beneficiaries of today's rate rise will be those with deposits, although commercial banks tend to be slower to pass on higher interest rates than for borrowers. Also likely to be feeling cheerier might be those heading overseas for a holiday.

Australia's challenges are shared in many similar economies. Canada's central bank last week lifted its cash rate by 50 basis points for second month in a row. New Zealand last month hiked its rate half a percentage point to 2%, while the US and the UK are also raising rates. Only the European Central Bank has held off despite inflation reaching an annual rate above 8%.

26a)

According to the article, as of June 2022 what is the official cash rate and how has it changed?

26b)

According to the article what is the underlying inflation rate for the March quarter?

What is the headline inflation for the March quarter?

c)

According to the article, mention one winner and one loser due to the action taken by the RBA.

26d)

"Inflation in Australia has increased significantly," said the RBA governor, Philip Lowe, in a statement. "While inflation is lower than in most other advanced economies, it is higher than earlier expected. "Inflation is expected to increase further, but then decline back towards the 2% to 3% range next year," Lowe said. Explain one argument supporting the inflation targeting by the RBA?

26e)

Draw a demand and supply graph showing equilibrium in the money market (short-run). " The Reserve Bank has announced the biggest single rise in the cash rate in 22 years as Australia's central bank tries to quash inflation before it gets out of control. Economists were again surprised by the size of the move, having been mostly split between predicting a 25 or 40 point increase, according to Bloomberg". Show how the Reserve Bank of Australia would accomplish the statement given using the short-run money market graph.

Explain how the Reserve Bank of Australia conducts the open market operation to achieve this objective.

26f)

Draw a demand and supply graph showing equilibrium in the money market (short-run). " The Reserve Bank has announced the biggest single rise in the cash rate in 22 years as Australia's central bank tries to quash inflation before it gets out of control. Economists were again surprised by the size of the move, having been mostly split between predicting a 25 or 40 point increase, according to Bloomberg". Show how the Reserve Bank of Australia would accomplish the statement given using the short-run money market graph.

Explain how the Reserve Bank of Australia conducts the open market operation to achieve this objective.(1.5 marks)