10th rise on RBA’s narrow path

There are hopes the Reserve Bank of Australia will slow its rate hikes, with the central bank today saying inflation had passed its peak as it lifted the cash rate to 3.6 per cent.

The RBA has raised the official cash rate for the 10th consecutive month, as it continues its bid to stop high inflation.

The 25 basis point jump takes rates to their highest level since May 2012.

Chart: Australia's cash rate. Created by Business News with RBA data, using Datawrapper.

But there was a promising change of tone.

“The monthly CPI indicator suggests that inflation has peaked in Australia,” RBA governor Philip Lowe said. 

“Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia. 

“Services price inflation remains high, with strong demand for some services over the summer.”

The bank continued to warn the path to a soft landing of the economy was a “narrow one”.

A pause in interest rate rises could happen as soon as April, according to economists from the Commonwealth Bank of Australia, although the bank said one more rate rise at that meeting is more likely.

The CBA said it expected the cash rate would reach a peak of 3.85 per cent.

The big commercial bank also expects the RBA will start to cut interest rates later this year, and predicted rates would come down by a full percentage point by mid-2024.

However, CBA has been consistently dovish on interest rates, underestimating how hard the RBA would move in seeking to stop inflation.

Moody's Analytics also expects a 25 basis point rise in April, although it said a 15 basis point rise was a possibility.

Wages and GDP data showed interest rate hikes had started to impact the economy, Moody's said.

Not all observers were convinced the RBA was ready to slow, however.

Asia Pacific economist at job site Indeed, Callam Pickering, said the market had been anticipating a further 50 basis points of hikes this year.

“For that to occur, we’d need to see inflation show meaningful signs of improvement in April and then July - the next two quarterly inflation releases - along with some softer results from the monthly inflation measure,” Mr Pickering said.

“In the absence of that, the RBA will have little choice but to remain aggressive.”

He said inflation had eroded a decade of wage gains in the blink of an eye, and failing to deal with it would entrench the problem.

“We simply cannot afford another year of that,” Mr Pickering said.

In its statement, the RBA said further tightening would be needed.

“In assessing when and 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,” the bank said. 

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Last month, the RBA flagged more rate rises were to be expected.

Financial markets were yesterday forecasting the cash rate could near 4.2 per cent by the end of the year, according to the closing prices of ASX bank bill futures on Monday.

But showing the importance of the change in tone, that number was closer to 4 per cent at the close of trading on Tuesday.

The latest rate rise comes after inflation hit a fresh high in the year to December, at 7.8 per cent nationally.

January’s data showed the rate had eased, however, at 7.4 per cent over 12 months.