The Reserve Bank of Australia (RBA) has announced another 25 basis point (bp) rate hike, taking the official interest rate to 3.1 per cent.
Despite the widely unexpected slowdown in inflation in October, the RBA has opted for another cash rate hike, taking interest rates to their highest level in over a decade.
“Inflation in Australia is too high, at 6.9 per cent over the year to October,” governor Philip Lowe said.
“Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role. Returning inflation to target requires a more sustainable balance between demand and supply.”
While a number of economists believed that the RBA would give consideration to a ‘Santa pause’ at its final policy meeting of the year, an increase of 25 bps was still seen as the most likely scenario.
Commenting on the RBA’s eighth consecutive rate hike, Anneke Thompson, chief economist at CreditorWatch, said, “Today’s decision by the RBA to further raise the cash rate will place undeniable financial pressure on Australian households”.
“Combined with the budget’s forecast rising prices on everyday goods, housing and energy, and lacklustre wages growth, this latest increase in the cash rate all but guarantees consumer confidence will weaken as we enter the busy Christmas retail period,” Ms Thompson said.
She noted that data and forecasts released in the latter half of October all point to difficult economic conditions in 2023.
“It is likely given all signs are pointing to a weakening economy, that the RBA will take slower steps in tightening monetary policy, as they try to avoid sending Australia into recession.”
Prior to the RBA’s final meeting of the year, AMP’s chief economist, Dr Shane Oliver, stated that continued high inflation, strong job and wage data, and the absence of an RBA meeting in January all point to another 0.25 per cent hike.
Acknowledging the risk of one more hike to 3.35 per cent in February, Dr Oliver said that by the end of 2023, “we expect weak growth and a sharp fall in inflation to drive the start of rate cuts”.
Similarly, Scott Solomon, associate portfolio manager of T. Rowe Price’s Dynamic Global Bond Strategy, said, “We expect the Reserve Bank of Australia to go ahead and hike 25 basis points”.
“Governor Lowe is trying to strike a balance [between] maintaining full employment, allowing for lagged economic effects of policy, and appearing tough on inflation — in that order.
“Given the strong employment data in November and the upcoming January meeting break, the easiest path for the RBA is to go ahead with a full 25 bp hike,” Mr Solomon added.
Prior to Tuesday’s rate call, the market did price in the possibility of a 15 bp hike or even a pause, but an upcoming further downshift in policy was addressed in the bank’s statement.
