RBA delivers another 25bp rate hike

Australia’s central bank raised its benchmark interest rate for the eighth straight meeting today (December 6) and signalled further tightening to curb high inflation.

The Reserve Bank of Australia’s nine-member board raised the cash rate by 25 basis points to 3.1%, the highest since November 2012.

“Inflation is too high,” said RBA governor Philip Lowe. “The board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.” 

High inflation is contributed mostly by global factors, yet strong domestic demand is also playing a role, said Lowe.

Consumer price inflation in Australia took a surprise dip to 6.9% year on year in October, from 7.3% in September. But the RBA expects prices to rise further over the months ahead.

The central bank forecasts annual inflation to peak at around 8% in the December quarter, before declining over the next couple years to a little above 3% over 2024.

The RBA has lifted its cash rate by a total of 310bp since it began tightening in May. It was the first central bank among developed economies to slow down its tightening to 25bp increments in October.

All 30 economists polled by Reuters had expected the RBA to deliver another 25bp hike, its third in a row after a succession of half-point increases.

On the other hand, neighbouring New Zealand’s central bank raised its policy rate by a record 75bp to 4.25% in its last November meeting. The Reserve Bank of New Zealand was among the earliest central banks to start raising rates last year and has forecast a terminal rate of 5.5% in September 2023.

Australia’s economy is continuing to grow solidly, said Lowe. The RBA expects economic growth to moderate over the coming year due to a global slowdown and an expected cutback in household consumption growth due to tighter financial conditions. The central bank forecasts Australia’s GDP to grow by around 1.5% in 2023 and 2024.

But the global economic outlook and the impact of monetary tightening on household spending remain uncertain, Lowe warned. “The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one,” he said.

One key area the RBA will closely monitor is the labour market, which the governor described as “very tight” now. Australia’s unemployment rate fell to 3.4% in October, the lowest since 1974. Lowe stressed the importance of avoiding a prices-wages spiral, noting that job ads and vacancies are both at “very high levels” and wages are continuing to rise.

“Since the RBA has policy meetings approximately every month, it can continue to hold a very straightforward meeting-by-meeting, data-dependent approach,” said ING FX strategist Francesco Pesole in a note. “There was unsurprisingly very little forward guidance in today’s statement except for the vague reference to more tightening ahead.”

ING expects the RBA to deliver another 25bp increase at its next meeting in February and forecasts the terminal rate to be 3.6%.

Commonwealth Bank of Australia, meanwhile, revised up its prediction of the terminal cash rate from 3.1% to 3.35%. But it added that there is a risk that the RBA could raise rates to 3.6%.