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RBA’s inflation forecast anchored on 3.75% interest rate

4 minute read

The RBA considered a 50 basis points interest rate increase at its last meeting.

The board of the Reserve Banks (RBA) considered two options for its policy decision at its meeting earlier this month — a 50 basis point increase and a 25 basis point increase.

In the minutes of its monetary policy meeting, published on Tuesday, the central bank said the arguments for a 50 basis point increase stemmed from the concern that there had been a pattern of incoming prices and wages data exceeding expectations, and a risk that high inflation would be persistent.

“If it did persist, there would be significant costs, including higher interest rates and a larger increase in unemployment later on. Relatedly, members observed that the longer inflation stayed high, the greater the risk of price and wage expectations moving higher,” the RBA said.


The arguments in favour of a 25 basis point increase, which ultimately prevailed, included the expectation that inflation had peaked, the outlook for consumption growth was softening, and there were several uncertainties surrounding the outlook.

“Members observed that, while underlying inflation had been higher than previously forecast, headline inflation was below earlier expectations. The forecast was for inflation to fall within the target range by the end of the forecast period in mid-2025,” the RBA said.

“Many households were facing tighter budgets and, in aggregate, real incomes were falling. There were plausible scenarios in which consumption growth was weaker than expected and inflation fell faster than forecast, as well as scenarios in which the opposite occurred.”

Ultimately, the case to increase the cash rate by 25 basis points was the “stronger one”, the bank acknowledged.

However, the board disclosed that forecasts for output and inflation had been made based on the technical assumption that the cash rate would reach approximately 3.75 per cent, and in line with this, the bank announced that “further increases” are expected in the months to come.

“In assessing how much further interest rates might need to increase, the board will continue to evaluate developments in the global economy, trends in household spending and unemployment, the evolution of labour costs, and the price-setting behaviour of firms,” the bank said.

Reiterating that the board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, the RBA acknowledged that the “path here is a narrow one and there are risks in both directions”.

The board decided to increase the cash rate target by 25 basis points to 3.35 per cent on 7 February.

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.