PHOTO: RBA governor Philip Lowe. FILE
The Reserve Bank of Australia has lifted the official cash rate by 25 basis points following its first meeting of 2023, taking rates to their highest level since 2012 and flagging that further rises are likely in the months ahead.
Announcing the decision, RBA Governor Philip Lowe said that stubbornly high inflation rates were a key motivation for the cash rate increase.
“In Australia, CPI (consumer price index) inflation over the year to the December quarter was 7.8 per cent, the highest since 1990,” he said.
“In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.”
Dr Lowe said that while inflation was forecast to decline in 2023, it was “important that this remains the case”.
“The Board’s priority is to return inflation to target. 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,” he said.
Dr Lowe acknowledged that the RBA’s cash rate rises had already caused pain for some households.
“Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices,” he said.
He said that there was some uncertainty about when household spending would slow.
“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” he said.
Despite this, Dr Lowe flagged the strong possibility of further cash rate rises to come in the months ahead.
“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” he said.
“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.”
Geoff Lucas – The Agency
Chief Executive Officer and Managing Director of The Agency, Geoff Lucas said today’s 25 basis point cash rate rise was expected and he tipped another could be on the cards in March.
“Due to recent economic data, and specifically US wages data, it’s possible we may see a further interest rate rise of 25 basis points at the March RBA board meeting before a period of stability,” he said.
“As it takes two to three months for rate rises to work their way into borrowers’ pockets, such a move would be fully impacting borrowers by May 2023.
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