In March, the Reserve Bank of Australia (RBA) continued with its consistent monetary policy approach by announcing the tenth consecutive interest rate hike.
Market analysts and policymakers anticipated this decision, as it resulted in a 25 basis points (bps) increase in the Official Cash Rate (OCR). The cash rate target now stands at 3.60 per cent, while the interest rate on Exchange Settlement balances is at 3.50 per cent.
Importantly, the Reserve Bank of Australia (RBA) Board has indicated that they believe further tightening of monetary policy will be necessary in order to ensure that inflation returns to the target range of 2-3 per cent and that the current period of high inflation is only temporary.
Earlier, the bank raised the official cash rate by 0.25 percentage points following its monthly meeting in February, bringing it to 3.35 per cent.
Several factors, such as rising inflationary pressures and sustained economic growth, influenced the RBA’s recent decision to raise the OCR. The central bank seeks to strike a balance between boosting economic activity and managing inflation risks by increasing interest rates.
The RBA’s recent rate hike represents an extension of its ongoing tightening monetary policy approach that commenced in 2021. The central bank’s gradual interest rate increases aim to ensure a steady and enduring economic growth path. The RBA aims to prevent destabilising the economy while maintaining price stability by implementing a cautious approach to increasing interest rates.
“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the slowdown in household spending,” Philip Lowe, RBA Governor, said in a statement.
“The Board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains narrow.
“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary.”
More hikes on the way?
Matthew Greenwood-Nimmo from the University of Melbourne expressed concern about the high level of inflation and stated that the RBA would be cautious about allowing it to become entrenched. He noted that higher interest rates would help to manage inflation and keep inflation expectations at appropriate levels. Meanwhile,
Anthony Waldron from Mortgage Choice predicted another rate rise in March to curb inflation but said that the rate rise cycle was likely to end soon. More than half of the experts surveyed (55 per cent, 23/42) believe the RBA will hold the cash rate in April.
The CEO of Finder, Graham Cooke, stated that many Australians are frustrated with the RBA as it doesn’t seem to comprehend the financial difficulties some families are experiencing. He noted that the research reveals that 13 per cent of Australian homeowners were late on at least one mortgage repayment in the past six months.
Stephen Miller of GSFM indicated that the main problem is the RBA’s insular culture. He recommended more recruitment from various levels of the private and public sectors to promote healthy internal debate and dissent.
Global inflation moderating, but services remain high
Despite a moderation of global inflation in headline terms, services price inflation remains high in several economies. It may take some time before inflation returns to target rates. The global economic outlook remains subdued with below-average growth expected in the near future.
Inflation peaked in Australia, services remain high
The latest CPI indicator suggests that inflation in Australia has peaked, and goods price inflation is likely to moderate due to global developments and weaker domestic demand. However, service price inflation remains high, with strong demand for some services. Rents are increasing at the fastest rate in several years, with low vacancy rates across many regions. The central forecast is for inflation to decrease this year and next, with a mid-2025 target of around 3 per cent. Medium-term inflation expectations remain anchored, and it is crucial to maintain this stability.
Slowdown in Australian economic growth
The Australian economy has experienced a slowdown in growth, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. This growth rate is expected to remain below the trend in the next few years. Household consumption growth has decreased due to tighter financial conditions, while the outlook for housing construction has weakened. However, the outlook for business investment remains positive, with many firms operating at high levels of capacity utilization.
Labour market remains tight, and unemployment expected to rise
The labour market remains tight, but conditions have slightly eased. The unemployment rate is close to a 50-year low, and while employment fell in January, this is partly due to changing seasonal labour hiring patterns. Many firms are experiencing difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to rise.
CreditorWatch’s Chief Economist, Anneke Thompson noted that the latest increase would take many personal and business borrowers well past their lenders’ serviceability test and will be a serious drag on both consumer and business sentiment.
“In February we learned that while the Australian economy continued to grow in the December quarter, the growth rate slowed substantially,” Anneke said.
“Australian Gross Domestic Product (GDP) grew by 0.5 per cent over the Dec quarter, down from 0.7 per cent in September quarter and 0.9 per cent in the June quarter. Importantly, for both the inflation and cash rate outlook, growth in household spending rose by a moderate 0.3 per cent.
“This will give the RBA comfort – among other important indicators like monthly retail trade and labour force – that its efforts to reduce inflation are working. Unfortunately, the flip side to this success is continued pain for the Australian consumer and, ultimately, businesses.”
CreditorWatch’s Business Risk Index continues to point to businesses acting in an increasingly cautious manner. Data from February 2023 shows that credit enquiries in February 2023 were more than double those in February 2022. This is despite average trade receivables per data supplier decreasing by 10 per cent year-on-year in February 2023. Businesses are clearly more concerned about the financial stability of the businesses they are trading with, given the economic conditions and large decline in consumer sentiment.
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