The Reserve Bank of Australia raised interest rates for the tenth consecutive time on Tuesday to the highest level since May 2012. The move to raise 25bp rate hike took the cash rate to 3.6% which was in line with the consensus. The RBA cash rate has been increased substantially in a short period of time. Board dialed down the hawkishness of the previous statement, “In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”
RBA patience at an end
Highlights
- Cash rate raised to 3.60% from 3.35%
- Board remains resolute in its determination to return inflation to target
- Board expects that further tightening of monetary policy will be needed
- The monthly CPI indicator suggests that inflation has peaked in Australia.
- Services price inflation remains high, with strong demand for some services over the summer
- Board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one
- Growth in the Australian economy has slowed
- There is uncertainty around the timing and extent of the slowdown in household spending
- Household consumption growth has slowed due to the tighter financial conditions
- Uncertainties mean that there are a range of potential scenarios for the Australian economy
- Labour market remains very tight, although conditions have eased a little
- Wages growth is continuing to pick up in response to the tight labour market and higher inflation
- Recent data suggest a lower risk of a cycle in which prices and wages chase one another
- Board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment
The total of 350bps rise also marked the sharpest annual tightening since 1989.
Prior Statement:
“The Board expects that further increases in interest rates will be needed over the months ahead”
This guidance today is milder, points to at least one hike and then assessing the data ahead. And that high inflation is transitory.
Today’s Statement less hawkishness.
The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing when and how much further interest rates need to increase, the Board will be paying 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.
Statement by Philip Lowe, Governor: Monetary Policy Decision
Number 2023-07 Date
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.50 per cent.
Global inflation remains very high. In headline terms it is moderating, although services price inflation remains elevated in many economies. It will be some time before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.
The monthly CPI indicator suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia. Services price inflation remains high, with strong demand for some services over the summer. Rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country. The central forecast is for inflation to decline this year and next, to be around 3 per cent in mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.
Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. Growth over the next couple of years is expected to be below trend. Household consumption growth has slowed due to the tighter financial conditions and the outlook for housing construction has softened. In contrast, the outlook for business investment remains positive, with many businesses operating at a very high level of capacity utilisation.
The labour market remains very tight, although conditions have eased a little. The unemployment rate remains at close to a 50-year low. Employment fell in January, but this partly reflects changing seasonal patterns in labour hiring. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase.
Wages growth is continuing to pick up in response to the tight labour market and higher inflation. At the aggregate level, wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another. The Board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.
The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.
The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. 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. The Board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.
The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing when and how much further interest rates need to increase, the Board will be paying 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
From The TradersCommunity News Desk