RBA Board pushes cash rate to 4.1 percent

The Reserve Bank of Australia has decided to raise the cash rate by a further 25 basis points in a meeting of the RBA Board today.

The interest rate now stands at 4.1 percent and represents the 12th increase since April last year.

In a statement by Governor Philip Lowe, the board noted that inflation had already peaked at 7 percent but it looked likely to remain stubbornly high for some time. With the understanding that it is likely to be an unpopular move with mortgage holders, Mr Lowe said the decision was taken to provide ‘greater confidence’ that inflation would fall to manageable levels within a reasonable time frame.

“High inflation makes life difficult for people and damages the functioning of the economy,” Mr Lowe said. “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.”

Although goods price inflation had slowed, he noted the impact of high services inflation, which remains high in overseas markets as well. Last week’s announcement by the Fair Work Commission that will see award wages rise by 5.75 percent and minimum wages by 8.6 percent from July 1 had further pointed to a likely rate rise.

Mr Lowe said the Board would continue to monitor economic conditions, including household spending and productivity both here and overseas but foreshadowed ‘some further tightening of monetary policy may be required’.

“The Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one,” he said.

A significant source of uncertainty continues to be the outlook for household consumption, he said.

“The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although 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.”

PropTrack senior economist Eleanor Creagh said projected wage increases and persistently low levels of unemployment had given the board ‘further headroom’ to consider today’s decision to raise the cash rate.

“The labour market remains tight,” she said. “Despite the unemployment rate rising, it remains close to multi-decade lows. The pipeline of wage increases in the public sector and (the) minimum wage decision are expected to maintain wages pressure, potentially fuelling inflation to remain elevated.”

The risk of a wage-price spiral is an ongoing concern for the central bank, she said.

“The RBA expects it will take a couple of years before inflation returns to the top of the target range, with the statement highlighting that the board is ready to do more to get inflation back down should it be necessary.”

This is in addition to rises experienced in housing prices this year, despite consistent increases in the cash rate. Ms Creagh said the conditions for higher home prices remained, despite the interest rate hike.

“The factors precipitating stronger housing demand – population growth and tight rental markets – remain alongside an undersupply of new homes,” she said. “This may see home prices to continue to lift in the months ahead.”