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Stagnant high inflation and growing wages mean further increases are on the horizon according to the board.
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RBA surprises businesses with cash rate rise, ‘risks recession’
07 June 2023
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10 minute read
The RBA has raised interest rates for the 11th time in the last 12 months up to 4.10 per cent, stating inflation is still too high, particularly on the service side.
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In his monetary policy statement, Philip Lowe said the further increase in interest rates was to provide greater confidence that inflation would return to target levels.
“High inflation makes life difficult for people and damages the functioning of the economy,” said Mr Lowe. “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.”
“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.”
BDO economic research partner Anders Magnusson said the RBA was risking recession and unnecessary pain due to the increase before the effect of previous rate rises had been seen.
“Inflation peaked in December and past RBA increases have already locked-in the efforts necessary to bring it closer to the target range of two to three per cent in the medium-term,” said Mr Magnusson.
“Both purchasing power of consumers and labour market indicators are showing that the levers vital for bringing down inflation are in motion.”
“Even though employed Australians are working more hours than a year ago and unemployment remains low, decreasing real wages and job vacancies have reduced the risk of inflation from a tight labour market.”
Chief executive of the Ai Group Innes Willox agreed and said the direction the RBA was heading was increasing the likelihood of a recession.
“This latest increase in interest rates is set to put pressure on disposable incomes, consumer spending, business investment and employment,” said Mr Willox.
“The likelihood of the current downswing turning into a recession is shortening by the month with the potential for a blowout of unemployment and underemployment now well and truly on the cards.”
“Wage pressures are growing and we are now at the point where current momentum will see further price pressures unless our stagnant productivity performance can be reignited.”
Director of fixed income at Franklin Templeton, Andrew Canobi, said the decision was a surprise given employment in May was softer with retail trade cooling significantly.
“The RBA seems to have taken fright from the minimum wage decision which is strange given it was arguably only marginally above expectations,” said Mr Canobi.
“The monthly CPI print which follows several monthly undershoots is volatile and not a particularly reliable indicator so ascribing a lot of weight to this recent number, as they appear to have done, is a little surprising.”
“The outlook of the Australian economy looks fairly grim from here as the household sector continues to get indigestion from an abundance of hikes that are still making their way into the economy.”
Mr Lowe acknowledged that the higher rates and cost of living pressures were leading to a substantial slowing in household spending but said further action could still be needed.
“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame,” he said.
“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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