RBA echoes sentiment with 25bp rate rise
The Reserve Bank of Australia (RBA) has reflected the majority of market sentiment by raising the official cash rate by 25 basis points (bp) to 4.35 per cent in its second-last meeting before Christmas.
Michele Bullock, RBA Governor, said in a statement that while inflation had passed its peak in Australia, it remained “too high and is proving more persistent than expected a few months ago”. The hike breaks the four consecutive rate pauses handed down since June, as the Board said the decision was warranted to return inflation to target in a reasonable timeframe.
“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,” Bullock said.
“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 statement from the central bank said its rate hiking cycle sought to establish a “more sustainable balance” between supply and demand against the economic background, noting the flow-on effects would still be ongoing. Bullock said the RBA thus held rates to examine the impact on inflation, the labour market, economic activity, household spending and property prices, and has now determined that inflation remained higher for longer, economy growth has been stronger in the first half of the year, labour market conditions remain tight and housing prices are continuing to rise – all more than expected.
While the Board acknowledged high inflation and interest rates continue to put pressure on real incomes, it reaffirmed its top priority is to return inflation to target “within a reasonable timeframe”.
“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,” Bullock said.
“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.”
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