The Reserve Bank Board has announced today a further 0.25% increase to the Official Cash Rate.

Below is the Media Release from the RBA.

Media ReleaseStatement by Philip Lowe, Governor: Monetary Policy Decision

Number2023-07Date7 March 2023

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.50 per cent.

Global inflation remains very high. In headline terms it is moderating, although services price inflation remains elevated in many economies. It will be some time before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.

The monthly CPI indicator suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia. Services price inflation remains high, with strong demand for some services over the summer. Rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country. The central forecast is for inflation to decline this year and next, to be around 3 per cent in mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. Growth over the next couple of years is expected to be below trend. Household consumption growth has slowed due to the tighter financial conditions and the outlook for housing construction has softened. In contrast, the outlook for business investment remains positive, with many businesses operating at a very high level of capacity utilisation.

The labour market remains very tight, although conditions have eased a little. The unemployment rate remains at close to a 50-year low. Employment fell in January, but this partly reflects changing seasonal patterns in labour hiring. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase.

Wages growth is continuing to pick up in response to the tight labour market and higher inflation. At the aggregate level, wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another. The Board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.

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. 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. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.

The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. 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. 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 a narrow one.

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. In assessing when and 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 Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

The Reserve Bank has announced an increase of 0.50% for the Official Cash Rate.

This is the 2^nd consecutive rate increase and was widely anticipated to be the RBA strategy to combat the inflationary pressures currently experienced in the Australian economy.

Senior Economists predict the RBA will be forced to announce further rate increases if the current high spending levels and rising prices continues.

Borrowers will be considering their interest rate options as the Variable Interest Rates offered by many banks are currently lower than Fixed Interest Rates … but how long will this last ???

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