RBA tips more rate rises to come, despite ‘painful squeeze’

The RBA board said it was mindful of the already-considerable adjustment to interest rates.

The RBA board said it was mindful of the already-considerable adjustment to interest rates. Photo: AAP

The Reserve Bank says it is aware some households are facing a “painful squeeze” but insists inflation must be brought down to fend off damaging the economy.

The RBA board this week lifted the cash rate 25 basis points to 3.35 per cent – its highest point since September 2012 and the bank’s ninth consecutive monthly increase.

In announcing the rise, the RBA board said it expected more increases in interest rates would be needed in coming months to return inflation to its target.

Inflation is sitting at 7.8 per cent – its highest level since 1990 – and the central bank is aiming to get it back within its target band of 2-3 per cent.

In its latest quarterly statement on monetary policy, released on Friday, the RBA revised up its inflation forecast for the year ended June from 6.25 per cent to 6.75 per cent.

However, it was expected to ease to 4.75 per cent by year’s end.

  • See the RBA’s quarterly monetary statement here
RBA raises cash rate – again

The board said it was mindful of the already-considerable adjustment to interest rates.

“Some households have substantial savings buffers or are benefiting from the tight labour market and faster wages growth,” it said.

“Others, though, are experiencing a painful squeeze on their budgets due to higher interest rates and the rising cost of living.

“In addition, some households may moderate their spending in response to the decline in housing prices.

“In light of these competing forces, the board is closely monitoring household spending and saving behaviour, and their contribution to domestic demand pressures.”

The board said high inflation made life difficult for people and damaged the functioning of the economy.

“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later,” it said.

“The board expects that further increases in interest rates will be needed to ensure that the current period of high inflation is only temporary.

“In assessing 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.

“It remains resolute in its determination to return inflation to target and will do what is necessary to achieve this.”

The RBA also said that electricity and gas prices were expected to keep rising this year but would be “dampened” by the federal government’s $1.5 billion relief plan.

Treasurer Jim Chalmers seized on the comment as evidence the independent central bank had endorsed the government’s plan, which was the subject of talks with state and territory treasurers on Friday.

“We are not surprised but we are very pleased to see that the independent Reserve Bank has said today our energy plan will have exactly the consequences and impact we said it would have,” Dr Chalmers said.

“We are acting decisively to take some of the sting out of these high energy prices.”

He said the savings – to be detailed in the May federal budget – would not flow until the middle of the year and were still subject to states and territories agreeing separate plans to provide their share of bill relief.

“We will deliver this relief … it will make a meaningful difference,” he said, adding that state deals could be struck within weeks.

Wages growth on the horizon

The RBA expects aggregate wages growth to pick up further over 2023, with growth in the wage price index forecast to peak about 4.25 per cent late in the year. That would still represent a real pay cut for workers, with the bank’s predictions for inflation at 6.75 per cent.

It does not expect wages growth to slightly exceed the rising cost of living until June 2024.

The unemployment rate is expected to start picking up from around the middle of 2023, reaching 4.5 per cent by mid-2025.

The outlook is for slower GDP growth this year and next, about 1.5 per cent.

It noted forecasts for overall GDP growth in Australia’s major trading partners in 2023 and 2024 are unchanged compared with three months ago, about 3.5 per cent.

The central bank welcomed China’s decision to allow the resumption of Australian coal purchases, after a pause in imports since 2020, and the reopening of the Chinese economy more broadly.

-with AAP

Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter.
Copyright © 2024 The New Daily.
All rights reserved.