The Reserve Bank of Australia (RBA) has announced a 25 basis points increase in the cash rate target to 3.85%, citing high inflation as a key concern.
"Inflation in Australia has passed its peak, but at 7 percent is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today," RBA Governor Philip Lowe said in a board statement.
"The Board's priority remains to return inflation to target," Lowe wrote in the release. "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. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. Today’s further adjustment in interest rates will help in this regard," Lowe said.
The increase follows a hold in rates last month to assess the state of the economy and its outlook, Lowe's statement said. While goods price inflation is slowing, services price inflation is still high and unit labor costs are rising briskly, with productivity growth remaining subdued. The labor market remains tight, with the unemployment rate at a near 50-year low, and wage growth has picked up in response to high inflation and the tight labor market, he said.
"The Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 percent target range, but the path to achieving a soft landing remains a narrow one. The central forecast is for the economy to continue growing, albeit at a below-trend pace; GDP is forecast to increase by 1¼ percent this year and around 2 percent over the year to mid-2025. Given the expected below-trend growth in the economy, the unemployment rate is forecast to increase gradually to be around 4½ percent in mid-2025," Lowe's statement said.
"A significant source of uncertainty," Lowe said, "continues to be the outlook for household consumption. The combination of higher interest rates, cost-of-living pressures and the earlier decline in housing prices is leading to a substantial slowing in household spending. While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances."
"Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve," Lowe said in the release. "The Board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labor market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."