The Reserve Bank of Australia announced a +25bp interest rate hike, as widely expected by analysts after last month’s inflation reports. It is the RBA’s 13th cash rate hike since they began this hiking cycle in May of 2022. The OIS market had been pricing the probability of a rate hike at 50/50. The cash rate at 4.35% is the highest level since May 2012. Prior to this meeting the RBA has left the cash rate unchanged at four consecutive meetings. Tuesday’s board meeting was the second chaired by new RBA governor Michele Bullock who began the role on September 18.
The bank 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. The AUD/USD rate fell from .6482 to .6456 after the announcement though well up from last month’s meeting around 0.6340.
RBA walking a thin line of inflation and recession.
Highlights
- Cash rate raised to 4.35% from 4.10%
- Board remains resolute in its determination to return inflation to target
- CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.
- Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.
- Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks
- Still significant uncertainties around the outlook
- Services price inflation has been surprisingly persistent overseas and the same could occur in Australia
- To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case
- High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment
- Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up
- Weight of information suggests that the risk of inflation remaining higher for longer has increased.
- Headlines via Reuters
The total of 410bps rise also marked the sharpest annual tightening since 1989.
Statement by Michele Bullock, Governor: Monetary Policy Decision
Number 2023-30 Date
At its meeting today, the Board decided to raise the cash rate target by 25 basis points to 4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.25 per cent.
Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.
The Board had held interest rates steady since June following an increase of 4 percentage points since May last year. It had judged that higher interest rates were working to establish a more sustainable balance between supply and demand in the economy. Furthermore, it had noted that the impact of the more recent rate rises would continue to flow through the economy. It had therefore decided that it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest rates so far. In particular, the Board had indicated that it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
Since its August meeting, the Board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased. While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.
At the same time, high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. This is a more moderate increase than previously forecast. 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 much more 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.
There are still significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will 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 remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.
Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will 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 domestic demand, 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 outcome.
Source: RBA
Via a Sunburnt Country
From The TradersCommunity News Desk