RBA back on the hike with 25bp rate rise

The Reserve Bank of Australia (RBA) has dispelled any uncertainty among economists regarding its latest monetary policy decision, hiking rates up by a further 25 basis points to 4.10 per cent.

This is the highest the official cash rate has been since it was lifted to 4.25 per cent 11 years ago on 4th April 2012.

RBA Governor, Philip Lowe, highlighted that despite Australia having passed the peak of inflation, it still remains too high at seven per cent. He attributed this rate increase decision “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,” he said.

“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.”

The Board said that Australian economic growth has slowed, labour market conditions have eased and wages growth has picked up, despite the unemployment rate increasing to 3.7 per cent.

It also flagged the potential for further rate increases in the coming months, but that it was dependant on how the economy and inflation “evolve”. The Board also continued its sentiment from last month’s policy decision regarding high levels of household consumption and its impacts on inflation and interest rates.

“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,” Lowe said.

“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.”