RBA hikes cash rate to 4.35% amid unyielding inflation

Investing.com - In today's meeting, Reserve Bank of Australia policymakers raised the cash rate target by 25 basis points, bringing it to 4.35%. Simultaneously, the interest rate applied to Exchange Settlement balances has been increased by 25 basis points, reaching 4.25%.

Despite having reached its peak, inflation in Australia continues to persist at a higher level than expected a few months ago. The latest Consumer Price Index (CPI) inflation data indicated that although the rate of inflation for goods prices has continued to ease, the prices of many services are rising at a brisk pace. The central forecast now anticipates a slower-than-initially-expected decline in CPI inflation. By the end of 2024, CPI inflation is projected to be around 3.5%, and it is expected to reach the upper end of the target range of 2 to 3% by the close of 2025. The Board deemed it necessary to increase interest rates today to ensure that inflation returns to the target within a reasonable timeframe.

Since June, following a 4 percentage point increase from May of the previous year, the Board has maintained interest rates at a steady level. The Board believed that the higher interest rates were contributing to a more sustainable balance between supply and demand in the economy. The Board, therefore, decided to hold rates steady to provide time to assess the impact of the increased interest rates. The Board has been closely monitoring global economic developments, trends in household expenditure, and the outlook for inflation and the labour market.

Since its August meeting, the Board has received updated information on inflation, labour market conditions, economic activity, and revised forecasts. This information suggests that the risk of inflation remaining higher for a longer period has increased. Even though the economy is currently experiencing a period of below-trend growth, it has been stronger than expected during the first half of the year. Underlying inflation was higher than forecasted at the time of the August forecasts. The labour market conditions have eased but remain tight. Housing prices continue to rise across the country.

However, high inflation is impacting real incomes, resulting in weak household consumption growth and dwelling investment. Given the below-trend growth forecast for the economy, employment growth is expected to be slower than labour force growth, leading to a gradual increase in the unemployment rate to around 4.25%. This is a more moderate increase than previously forecasted. Wage growth has accelerated over the past year but remains consistent with the inflation target, provided that productivity growth picks up.

The Board's priority remains to return inflation to the target within a reasonable timeframe. High inflation complicates life for everyone and hinders the economy's functioning by eroding savings, straining household budgets, complicating business planning and investment, and exacerbating income inequality. If high inflation becomes entrenched in people's expectations, it would be much more difficult and costly to reduce later, requiring even higher interest rates and a larger increase in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target, and it is crucial that this continues.

Significant uncertainties remain around the outlook. Services price inflation has been surprisingly persistent overseas, and the same could occur in Australia. There are uncertainties regarding the lags in the effect of monetary policy and how firms' pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers, and higher interest income. Globally, there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of conflicts abroad.

Whether further tightening of monetary policy is required to ensure that inflation returns to the target within a reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to the target and will take necessary measures to achieve that outcome.

This article first appeared in Investing.com