Australians’ respite from rising borrowing costs will be short-lived as the Reserve Bank surprised most economists by raising its key interest rate again and warned that more hikes may be needed.
The RBA board raised its cash rate 25 basis points to 3.85% at its monthly meeting on Tuesday, challenging investors who had bet the central bank would extend its pause for a second month. The dollar soared and stocks plunged in surprise.
The movement adds to 10 consecutive increases since last May and brings the cumulative increase to 3.75 percentage points.
“Inflation in Australia has passed its peak, but 7% is still too high and it will be some time before it returns to the target range,” RBA Governor Philip Lowe said in a statement. “Given the importance of returning inflation to target within a reasonable time frame, the board felt that a further interest rate hike was warranted today.”
Treasurer Jim Chalmers said the RBA move was “a really difficult decision for a lot of Australians who are already under pressure”.
“This is a reminder that inflation remains the number one challenge in our economy,” Chalmers said, adding that his next budget would prioritize “responsible cost-of-living relief” that does not increase inflation when it is released next Tuesday.
The rate decision came despite last week’s release of weaker-than-expected inflation, particularly on underlying price pressures that the RBA is closely monitoring.
Instead, the board weighed other factors, such as an unemployment rate at a nearly half-century low, the nation’s population expected to rise by 700,000 this year and next and a rebound in property prices.
The central bank has withstood its most intense scrutiny in decades of late with the release of the RBA review. The report recommended the creation of a more specialized monetary policy board among other changes, and Lowe criticized some of the findings, including the way the current board makes key decisions.
As an indication that the RBA is ready to raise rates again, Lowe said “further monetary policy tightening may be needed to ensure inflation returns to target within a reasonable time frame, but that will depend on how the economy performs.” and inflation.”
“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 labor market,” he said. “The board remains resolute in its determination to bring inflation back on target and will do whatever it takes to achieve it.”
Investors responded by driving the Australian dollar around three-quarters of a cent higher to over US67c. Shares fell about 1.2% on the news as investors weighed the effect of higher borrowing costs on companies.
Among the big banks, the CBA correctly labeled today’s interest rate hike. The ANZ had targeted a quarter-point rise in August, while Westpac and NAB predicted the cash rate had peaked at 3.6% and the next move would be a cut.
The source of inflation is shifting from goods, as pandemic disruptions ease, to services. “[Services] price inflation remains very high and broad based and experience abroad points to upside risks,” Lowe said.
“Unit labor costs are also rising rapidly, and productivity growth remains subdued.”
The Australian Bureau of Statistics will publish Wage Price Index figures for the March quarter on May 17.
The RBA will publish its quarterly updated statement on monetary policy on Friday. Among the figures provided in today’s release is a downward revision to forecast GDP growth for this year.
The central bank now expects growth in 2023 to be 1.25%, or slower than the 1.5% forecast by the RBA in February. Since the population is likely to grow by 2% or more, output per capita will be negative.
The RBA expects a modest increase in the GDP growth rate to “around 2%” in the 12 months to 2025. That number hasn’t changed since February.
ACTU secretary Sally McManus said the rate hike was “a bad decision”.
“We can see inflation around the world coming down and that’s because it’s being driven by supply chain issues and by companies like Qantas raising prices and raising prices more than necessary,” McManus said. “The Reserve Bank should denounce that and put pressure on companies to stop raising prices.”
Lowe said the board remained “alert to the risk that ongoing high inflation expectations will contribute to further increases in both prices and wages, especially given the limited spare capacity in the economy and the historically low unemployment rate.” low”.
“Accordingly, it will continue to pay close attention to both labor cost developments and the pricing behavior of companies,” he said, implying that company behavior was also being watched.
