The Reserve Bank of Australia again surprised consensus with another 25-bps rate hike, lifting the cash rate to 4.10% to the highest level since May 2012. The RBA similarly surprised analysts last meeting. Perhaps this is more analyst out of synch with the Bank. The consensus was for no change, The RBA cash rate had been increased substantially in a short period of time. The Australian dollar was boosted by the surprise rate hike by the RBA sending the AUD/USD jump up 1% from 0.6615 to over 0.6685.
The move has created political backlash with the Australian treasurer speaking out against the mover, so much for political independence. There is concern in Australia against the RBA raising rates hurting mortgage holders and the economy.
What has surprised the consensus is three meetings ago the board dialed down the hawkishness of the previous statement to emphasize only “some further tightening” versus previously saying “further tightening” will be needed. This added to the consensus of no change this time around.
RBA patience at an end
- Cash rate raised to 4.10% from 3.85%
- Inflation has passed its peak but is still too high
- It will be some time yet before it is back in the target range
- Economic growth has slowed and labour market conditions have eased, although they remain very tight
- Wages growth has picked up in response to the tight labour market and high inflation
- RBA remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages
- The path to achieving a soft landing remains a narrow one
- A significant source of uncertainty continues to be the outlook for household consumption
- Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe
The total of 375bps rise also marked the sharpest annual tightening since 1989.
Statement by Philip Lowe, Governor: Monetary Policy Decision
Number 2023-10 Date
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 4.10 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.00 per cent.
Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range. This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.
High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family 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. Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this. While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.
Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated. Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.
Wages growth has picked up in response to the tight labour market and high inflation. Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.
The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very 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 is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one. A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve. 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.
The release of an independent review on the Reserve Bank of Australia a few months ago, An RBA fit for the future review gave 51 recommendations.
Via a Sunburnt Country
From The TradersCommunity News Desk