As expected, the Reserve Bank of Australia (RBA) has hiked its cash rate from 4.10% to 4.35%, the +25 basis points rise markets were expecting.
That comes after three 'on hold' monthly decisions. It rose +25 bps to 4.1% on July 5, 2023.
Australia is finding high inflation embedded deeply now, a persistence that is hard to quell. Inflation expectations are still running higher than 5%, probably closer to 6%.
The Australian central bank has been a laggard in using interest rate signals to push back against high inflation. Even this new higher 4.35% rate will be at a level that is far lower than most similar central banks have adopted. The US is at 5.50%, Canada is at 5.00%, ECB is at 4.50% and the RBNZ is at 5.50% too, of course. The UK is at 5.25%, India at 6.50%. China is at 3.45% however and Japan still just at essentially zero. But these last two do not have elevated inflation pressure.
Australia's monthly inflation indicator came in at 5.6% in September, having risen from 4.9% in July. The October level will be released on November 29, 2023.
At its October review, the RBA said inflation had "passed its peak" but that conclusion has not aged well.
The RBA's cash rate, Australia's benchmark interest rate, is the highest it has been since 2012. The RBA started increasing it from a record low of 0.10% in May 2022. It took a brief pause in the hiking cycle in April. But now markets are suggesting that yet another rise could also happen at their December monthly meeting, potentially taking it up to 4.60%.
The December review will be the final RBA monthly review. In 2024 they are reverting to the less frequent assessments, about every six weeks, more like the rest of the main central banks do.
Update: Initial financial market reaction saw the AUD sold lower from 65.0 USc to 64.6 USc and falling as this note is updated. The NZD has risen +40 bps vs the AUD. The Australian 10 year Government bond yields have moved marginally lower with the 10yr down -4 bps and the 2yr down -6 bps. So far there has been little reaction on equity markets, holding to a down day (later update: the loss has been pared back). Overall, these reactions are minor (so far), showing that the hike has been essentially priced in.
Statement by Michele Bullock, Governor: Monetary Policy Decision
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.
21 Comments
While Labour here in NZ is thinking up ways to fleece more New Zealanders, the Aussies are on to it.
"Middle Australia has strongly backed tax cuts for individuals and a curb on government spending to help ease the inflation burden, as the nation braces for another potential interest rate hike on Tuesday.
An exclusive Newspoll – conducted ahead of Tuesday’s meeting of the Reserve Bank to consider a first interest rate rise in five months – showed that a majority of people believed the best thing the government could do was to subsidise energy bills. This was followed by subsidising fuel prices, cutting government spending to reduce inflation, and tax cuts for individuals.
While still favoured by a majority of Australians, the provision of cash payments to low-income households was the least favoured option."
And this from a population that voted in a Labor Govt in a landslide. Its also impressive that the Australians understand that Govt spending is driving inflation, a fact that seems to be lost on New Zealanders completely.
What do you mean by "Aussies are on to it." here?
If RBA raises interest rates in response to inflation and then the public asks for tax cuts and more spending/subsidies (expansionary fiscal policy) that is not a coherent combination of policy decisions.....Where will the money for subsidies come from if they also want tax cuts? Borrowing.....at higher interest rates.....
Australia do things slightly differently to most of the Anglosphere, they sell more stuff than they buy. This unique approach has underwritten their prosperity for much of the last 40 years or so. This gives them options that places like NZ, USA or the UK for example do not have, as they run trading account deficits, not surpluses as the Ozzies do. Yes, I know their balance sheet shows they have just as much debt as we have, but it's always handy to have options up your sleeve, when facing tough calls about reality, which do occur from time to time.
I don't think you are seeing the whole picture.
Australia's trade surplus is entirely due to a handful of enormous companies exporting iron ore, coal etc. Those companies are largely owned by foreigners so the dividends and capital appreciation are repatriated to UK, Europe, USA etc. The States do get some royalties and there is the employment tax, but Australia has so much bureaucracy to pay for it is largely frittered away.
Well said.
Reaction from the mighty Chris Joye:
"RBA resisted political pressure and did the right thing, lifting the cash rate to 4.35%, still only a shade above what they say is the "neutral rate" of 3.8% - and still not getting inflation *inside* their target 2-3% band until 2026... They look like they are behind the curve compared to the Fed (5.25-5.50%), RBNZ (5.5%), Bank of Canada (5.0%), and Bank of England (5.25%). They could have more heavy lifting to do..."
They make up a large share of the ASX, so there are huge superfund holdings in the mining companies, so normal Australians benefit through their super returns. In addition, the mining companies support a large ecosystem downstream like the engineering companies, railways, shipping etc.
It's also worthy to note how much they have invested in infrastructure: road, rail, ports etc. as well as education of scientists, engineers, and trades people. And also with reasonably well run natural industry companies, and cooperative governments.
Some people say 'they just dig it up', but it have taken a lot of effort and smarts to get there.
That is the crux isn't it. Necessary or unnecessary.
If only the speculative gamblers and the bankers had not let their their greed put the whole system at risk. All to the point were inflation has exploded and has destabilized the game.
So bail out the gamblers thru further inflation, or let them be crushed under the weight of their leverage.
What to do indeed.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.