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UPDATED: Concerns over the tight labour market and services inflation forced the bank to raise rates – and it might have to increase them again.
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More rises possible with 2 years before CPI hits target: RBA
03 May 2023
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10 minute read
The RBA surprised observers with a 0.25 basis points rise yesterday that takes the cash rate to 3.85 per cent and said more increases might be required depending on how the economy reacts.
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The bank said although inflation had passed its peak, at 7 per cent it remained too high and the path to its target range of 2 to3 per cent “remains a narrow one”.
“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 4.5 per cent in 2023 and 3 per cent in mid-2025,” the RBA said.
The forecast included below-trend GDP growth of 1.25 per cent this year and 2 per cent next, with a corresponding increase in unemployment to 4.5 per cent by mid-2025.
However, the RBA said the labour market and services inflation were two causes for concern.
“Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions,” it said. “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.
“Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.”
HLB Mann Judd debt advisory director Betty Preshaw described the RBA decision as “conservative” but essential to send the right signal.
“This is good, as the housing market is showing signs of stabilising with auction clearance rates and prices on the increase,” she said.
“If there was a rate pause, the message may have been translated as everything is OK and interest rates have peaked, which could have disastrous impacts on our economy as we are not out of the woods yet.”
CPA Australia senior manager of business and investment Gavan Ord said the decision was a stark reminder of the pressure businesses and households were under.
“Those who thought the rising interest rate cycle was over will be sorely disappointed,” he said. “We want next week’s budget to include targeted support for small businesses and the economy.”
CreditorWatch’s chief economist Anneke Thompson said the bank wanted to strip more demand from the economy.
“The RBA will be hoping that this latest move will put the economy deep into restrictive territory, and help to slow demand in the services space to ease price rises.
“We are now highly likely to be at the peak of the monetary policy tightening cycle, as the current settings will put enormous pressure on borrowers, particularly those that secured a home loan in the past two years.”
The bank said household spending had slowed but the picture was mixed, and the outlook for the global economy was uncertain.
“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,” it said.
“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.”
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