Australians’ respite from rising borrowing costs will be a short one, with the Reserve Bank surprising most economists by lifting its key interest rate again and warning more hikes might be needed.
The RBA board raised its cash rate 25 basis points to 3.85% at its monthly meeting on Tuesday, defying investors who had bet the central bank would extend its pause for a second month. The dollar soared and shares sank on the surprise.
The move comes on top of 10 consecutive rises since last May and brings the cumulative increase to 3.75 percentage points.
“Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range,” the RBA governor, Philip Lowe, said in a statement. “Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”
The treasurer, Jim Chalmers, said the RBA move was “a really difficult decision for a lot of Australians who are already under the pump”.
“This is a reminder that inflation remains the primary challenge in our economy,” Chalmers said, adding his upcoming budget would prioritise “responsible cost of living relief” that doesn’t add to inflation when it is released next Tuesday.
The rates decision came despite last week’s release of weaker-than-expected inflation, particularly for the underlying price pressures the RBA follows closely.
Instead, the board weighed other factors, such as a jobless rate at near half-century lows, the nation’s population expected to swell by 700,000 this year and next and a rebound in property prices.
The central bank has lately weathered its most intense scrutiny in decades with the release of the RBA review. The report recommended the creation of a more specialised monetary policy board among other changes, with Lowe critical of some of the findings including how the current board makes key decisions.
As an indication that the RBA is prepared to hike rates again, Lowe 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,” he said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
Investors responded by propelling the Australian dollar about three-quarter of a US cent higher to more than US67c. Stocks 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 called today’s interest rate rise. The ANZ had tipped a quarter-point rise in August, while Westpac and NAB both predicted the cash rate had peaked at 3.6% with the next move to be a cut.
The source of inflation is shifting from goods – as pandemic disruptions abate – to services. “[Services] price inflation is still very high and broadly based and the experience overseas points to upside risks”, Lowe said.
“Unit labour costs are also rising briskly, with productivity growth remaining subdued.”
The Australian Bureau of Statistics will release wage price index numbers for the March quarter on 17 May.
The RBA will release its updated quarterly statement on monetary policy on Friday. Among the numbers provided in today’s statement was a revision lower in predicted GDP growth this year.
The central bank now expects growth in 2023 to come in at 1.25%, or slower than the 1.5% forecast by the RBA in February. With the population likely to grow about 2% or more, per capita output will be negative.
The RBA expects a modest rise in the GDP growth rate to “around 2%” by the 12 months to 2025. That number is unchanged from February.
The ACTU secretary, Sally McManus, said the rate rise 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 such as Qantas price gouging and putting up prices more than they need to,” McManus said. “The Reserve Bank should be calling that out and putting pressure on companies to stop price gouging.”
Lowe said the board remained “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 historically 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,” he said, implying that company behaviour was also being watched.
