The Reserve Bank of Australia (RBA) has gone against most economists’ predictions and lifted the official cash rate (OCR) another 0.25% to 3.85%.
In his statement, Governor Phil Lowe noted that “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”.
“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”.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5% in 2023 and 3% in mid-2025”.
Lowe is especially concerned about sticky services inflation, noting it “is still very high and broadly based and the experience overseas points to upside risks”.
Perversely, he also cautioned that “unit labour costs are also rising briskly, with productivity growth remaining subdued”.
Only to then say that “at the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up”.
Meanwhile, “the labour market remains very tight, with the unemployment rate at a near 50-year low. Many firms continue to experience difficulty hiring workers, although there has been some easing in labour shortages and the number of vacancies has declined a little”.
The RBA also forecasts a per capita recession, noting “the central forecast is for the economy to continue growing, albeit at a below-trend pace”.
“GDP is forecast to increase by 1.25% cent this year and around 2% over the year to mid-2025. Given the expected below-trend growth in the economy, the unemployment rate is forecast to increase gradually to be around 4.5% cent in mid-2025”.
The RBA also flagged that “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 RBA ends by stating “the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”.
Hence, there may be further interest rate pain to come.
