RBA ends rate pause with further hike

Yasmine Raso

Senior Journalist, Financial Newswire

2 May 2023

The Reserve Bank of Australia (RBA) has decided to not hold the official cash rate at 3.60 per cent and instead has recommenced the hiking cycle with another 25 basis point increase to 3.85 per cent.

RBA Governor, Philip Lowe, said in a statement today that while inflation in Australia had passed its peak and currently sits at seven per cent, it remains well above the target range.

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today,” Lowe said.

“The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4½ per cent in 2023 and 3 per cent in mid-2025.

“Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions. But services price inflation is still very high and broadly based and the experience overseas points to upside risks. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

The RBA reaffirmed its top priority is to bring inflation down to the target range of two to three per cent and highlighted some uncertainty it has around the levels of household consumption.

“The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending,” the statement said.

“While some households have substantial savings buffers, 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.”

State Street Global Markets’ Head of APAC Macro Strategy, Dr Dwyfor Evans, said while it was a “surprise decision from the RBA” to increase the cash rate by 0.25 per cent after core inflation slowed, this month’s decision shifted focus onto services price inflation.

“Inflation remains high relative to target, but the softer core inflation released last week gave the Bank some breathing space, particularly on concerns around mortgage rates, but the focus in this instance is high services prices and rising labour costs,” he said.

“A decision that will support the AUD, particularly against currencies where the hiking cycle has come to an end.”