The Reserve Bank of Australia on Tuesday pressed ahead with a ninth straight increase to the official interest rate, taking it to 3.35 per cent, and said more rises would be necessary to tame high inflation despite some families experiencing “a painful squeeze” on their household budgets.
After peaking at 7.8 per cent in the December quarter, headline inflation is expected to fall to 4.75 per cent by year’s end but remain well above the RBA’s 2 per cent to 3 per cent target band until at least mid-2025.
At its first meeting of 2023, the RBA board raised the cash rate by 0.25 percentage points and said it remained committed to ensuring the current high inflation period was “only temporary”.
“The board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy,” Dr Lowe said in a decidedly hawkish statement following the meeting.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.” That means “further increases in interest rates will be needed in coming months”.
At 3.35 per cent, monthly repayments on a 25-year, $500,000 mortgage will have increased by $908 since May 2022, by $1362 for a $750,000 mortgage, and by $1816 for a $1 million loan, according to comparison website RateCity.
Inflation is the main game
While acknowledging the so-called “lag effect” of existing interest rate rises to date, which means many households are yet to feel the full hit to the cost of living, the bank’s No. 1 priority remained taming inflation.
“The board is seeking to return inflation to the 2-3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one,” Dr Lowe said.
“In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
The RBA governor said there was uncertainty around the timing and extent of the expected and necessary slowdown in household spending.
“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living,” he said.
Previewing the bank’s quarterly statement on monetary policy due out on Friday, Dr Lowe said on Tuesday a forecast 1.5 per cent economic growth in 2023 and 2024 was little changed from October.
“The recovery in spending on services following the lifting of COVID restrictions has largely run its course and the tighter financial conditions will constrain spending more broadly,” he said.
The central forecast for unemployment is an increase to 3.75 per cent by the end of this year and 4.5 per cent by mid-2025.
Innes Willox, chief executive of Australian Industry Group, said the prospect of further interest rate rises ahead was “sobering” news.
“There are strong signs the desired slowdown in activity is beginning to take effect and, as we get further along the path of monetary tightening, the risk of overdoing the rate rises clearly intensifies,” Mr Willox said.
“It is critical now that businesses, governments and employees exercise moderation in price setting and wages negotiations and avoid fuelling the inflation and inflation expectations.”
Cash rate could peak higher
A snap poll of 24 economists conducted by The Australian Financial Review on Friday showed 22 respondents expected the quarter-point increase, while the median forecast peak in the cash rate was 3.6 per cent.
That suggests just one more increase is due from the RBA, though the wording of the bank’s latest statement suggested it would peak higher.
Since May last year, the Reserve Bank has raised the cash rate on nine consecutive occasions, taking it from a record low 0.1 per cent to 3.35 per cent in the fastest monetary policy tightening cycle in a generation.
The poll also showed 18 respondents not forecasting any decrease in the cash rate this year, a view reinforced for many by the December quarter inflation data, which came in stronger than expected.
At 1.9 per cent over the quarter and 7.8 per cent over the year, the result was well above market consensus, though below the RBA’s forecasts. Dr Lowe said the bank believed headline inflation was now beginning to fall.
But of particular concern was the stronger-than-expected underlying result, which suggested strong momentum in prices towards the end of the year.
Underlying, or trimmed mean inflation, the RBA’s preferred measure that trims away large price movements, rose a 1.7 per cent over the quarter to 6.9 per cent annually.
Dr Lowe said while global factors explained much of the high inflation, “strong domestic demand is adding to the inflationary pressures in a number of areas of the economy”.
“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand,” he said.
Greens Treasury spokesman Nick McKim implied he was better qualified than the RBA to make monetary policy decisions and called on Treasurer Jim Chalmers to reverse the decision and ask Dr Lowe to resign.
“This blast of interest rate increases were never the right response to inflation driven by supply shocks and corporate profiteering,” he said, despite the RBA and Treasury telling him and other Greens senators on multiple occasions that “corporate profiteering” was not a primary cause of inflation and demand-side factors were playing into high inflation.
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