RBA Holds Rates at Ten Year High 4.10%, For Third Straight Meeting

The Reserve Bank of Australia left rates unchanged at the September meeting in line with the OIS market pricing the probability of no rate hike unanimously. The cash rate at 4.10% is the highest level since May 2012. It is the first time since March-April last year that the RBA has left the cash rate unchanged at three consecutive meetings. Tuesday’s board meeting was also the last chaired by RBA governor Philip Lowe, whose seven-year term ends next week. Michele Bullock, the RBA’s current deputy governor, will begin in the role on September 18. Inflation cooled to 4.9 per cent in July, lower than what was forecast, but above the central bank’s 2-3 per cent target range. In his final statement as RBA governor, Mr. Lowe said although inflation was declining, additional rate increases may be needed to curb inflation.

The bank has said some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe. There is concern in Australia against the RBA raising rates hurting mortgage holders and the economy.

RBA Lowe

RBA walking a thin line of inflation and recession

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks,” Reserve Bank governor Philip Lowe

Highlights

  • Cash rate unchanged at 4.10%
  • Higher interest rates were already having an impact on inflation,
  • Uncertain economic outlook, including the ongoing global pressures stemming from China’s property market.
  • “This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook,”
  • The RBA still forecasts inflation to return to the target range of 2–3 per cent in “late 2025” and expects unemployment will rise gradually to reach 4.5 per cent by late 2024
  • Australian economy experiencing a period of slower growth and was “expected to continue for a while”.

The total of 375bps rise also marked the sharpest annual tightening since 1989.

Reserve Bank of Australia Interest Rate

Statement by Philip Lowe, Governor: Monetary Policy Decision

Number 2023-23 Date

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.10 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.00 per cent.

Interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.

Inflation in Australia has passed its peak and the monthly CPI indicator for July showed a further decline. But inflation is still too high and will remain so for some time yet. While goods price inflation has eased, the prices of many services are rising briskly. Rent inflation is also elevated. The central forecast is for CPI inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.

The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Notwithstanding this, conditions in the labour market remain tight, although they have eased a little. Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4½ per cent late next year. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.

Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed.

There are significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. And globally, there is increased uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.

Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

Source: RBA

Via a Sunburnt Country

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