The Reserve Bank of Australia (RBA) has increased its cash rate by 25 basis points to 4.10% saying recent data indicates upside risks to the inflation outlook have increased.
The RBA says inflation has peaked but remains too high and it'll be "some time" until it's back within the RBA's 2% to 3% target range. A majority of economists had expected the RBA to leave its cash rate unchanged at 3.85%. The RBA's cash rate, Australia's benchmark interest rate, is now the highest it has been since 2012.
Governor Philip Lowe says the RBA's watching both labour costs, or wages, and the price-setting behaviour of firms.
"This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe," Lowe says.
"Recent data indicate that the upside risks to the inflation outlook have increased and the [RBA] 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."
Australia's Consumer Price Index (CPI) rose 7% in the year to March, according to the Australian Bureau of Statistics (ABS). As well as its quarterly data, the ABS also issues a monthly CPI indicator. The latest one showed a 6.8% increase in the 12 months to April.
The RBA has now increased the cash rate by 400 basis points since beginning to hike from its record low of just 10 basis points in May 2022.
"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," says Lowe.
"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 remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."
Lowe's full statement is below.
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.
23 Comments
Stone the crows! We're rooned I tells ya, rooned. How's a bloke supposed to pay his mortgage with these galahs in charge...
If this is what 25 bp does, imagine what's going to happens when it's 250. You know, like it was on the way down when it went from 7% to 3% in 6 months.
The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages
Despite all evidence to the contrary, we still have absolute confidence that inflation expectations contribute to larger increases in both prices and wages. This is a matter of faith - like our belief that the sun orbits the earth and that increases in the minimum wage lead to job losses.
Saw an interesting comment on Twitter how basically in Australia (and therefore NZ) all we've done is capitalised the value of two household incomes into house prices (and debt and bank profits). Think how much better off if that second income wasn't wasted bidding up house prices. And no wonder people aren't having kids.
Totally agree ABC. What a total waste for us as young women with feminist ideals who, back in the 80s and 90s, pushed very hard to work with our children. We thought we were giving ourselves and future women more choice and freedom but really all that has happened is that we have trapped young women in work and often made the choice for couples to have a family a very difficult one.
We also worked very hard to reduce inequalities, I spent my entire working life as a health researcher or in the health system, focused on reducing health inequalities. It is obvious that the basis of health inequalities sits very firmly in overall economic inequality … if you have low income and encounter a health problem - your health outcomes are likely to be worse; and then the other side of the coin if you suffer a chronic illness this will impact on your ability to create income. We were all just been tinkering around the edges as monetary and fiscal policies pushed up asset prices leaving those without assets behind and increasing over economic inequalities.
What a thought exercise it is to think about our second incomes being used productively …… we would all be living in our own modestly priced homes, families could choose to have a parent be at home with their children if they wished, if someone in the family got sick- the family could still manage, our economy would be diverse and productive including having a skilled and mature construction industry that we could all rely on. Best still we could afford to run our government infrastructure including health and education. Sounds like a time that my parents were in.
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