The Reserve Bank of Australia repeats Groundhog Day for the tenth time in a row with another official cash rate increase

Little humour will be lost referencing the Bill Murray movie based on a Groundhog that looks much like an overgrown rat drawn out of a barrel to predict the end of the winter season.

And while the analogy of a big rat predicting the end of winter may have little parallel to the reasoning behind The Reserve Bank of Australia (RBA) increasing rates to stave off their arch-enemy inflation, the parallel is becoming increasingly familiar as we are advised rate rise number 10 may not be the last in this recidivist series of official rate rises.

It is now distant history, when the official cash rate was 0.10% in April 2022, and looked likely to stay on those levels until 2024 based on the prediction made by the RBA in October 2020, when the RBA governor added a more explicit calendar-based element to the RBA’s forward guidance, noting that ‘we do not expect to be increasing the cash rate for at least 3 years’ (and later, ‘until 2024 at the earliest’).

But approaching mid-2022 the menace of tear-away inflation was staring down the RBA barrel and it was simply a matter of if the RBA would flinch, it did, and pulled the trigger on 3 May 2022, the start of 10 official rate increases in a row, each time the board met since May 2022, the only exclusion being January 2023 when Board members were on holidays and did not meet.

Today marks the tenth RBA meeting in a row that rates have been lifted, with a rate increase from 3.35% to 3.6%, a 0.25% rise. And 3.6% is a particularly prominent figure for the official cash rate, because sitting at just 1.0% higher at 4.6% was the average rate for the past 30 years, and many expect that level could be a dartboard target within this current round of rises.

In relative terms, this means a homeowner with a $500,00 loan with a term over 30 years will need to find another $82.00 a month to service the rate increase lift of today.

The decision by the board of the RBA to lift the nation’s official cash rate by 25 basis points from today, means homeowners enjoying interest rates based on just 0.10% in April 2022 will see their repayments on a $500,000 loan increase by $1,084 a month. With a monthly repayment of principal and interest of around $2,500 a month.

Statement by RBA Governor Philip Lowe 7 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.

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