Number Nine: RBA ups rates 25bp

Rate hikes are likely to continue in the months ahead, the Reserve Bank of Australia said as it lifted the cash rate to 3.35 per cent today.

The RBA increased the nation's benchmark interest rate by 25 basis points, with Reserve Bank governor Philip Lowe signalling more will come.

At 3.35 per cent, the cash rate is at its highest level since September 2012.

Mr Lowe said today that it would be some time before inflation was back to the target of 2 to 3 per cent, flagging a mid-2025 forecast.

"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," Mr Lowe said.

Observers said the RBA stance had become more hawkish, meaning increasingly aggressive about fighting inflation and raising rates.

Markets adjusted too, pricing in a cash rate of more than 3.9 per cent by August, 0.2 percentage points higher than the forecast at the close yesterday.

The Commonwealth Bank was among them, now projecting cash rates would peak at 3.85 per cent.

CBA has been consistently dovish on interest rate predictions.

Only in December the country’s biggest lender had expected rates would peak at 3.1 per cent.

But now the CBA expects rates will rise in March and April.

“This will take monetary policy into deeply restrictive territory,” the CBA said.

“Two further 25bp interest rate hikes means the probability of a soft landing for the economy is lowered significantly.  

“The budgets of many home borrowers will be under considerable strain over the coming year.”

Rates will need to be eased by the end of the year to avoid a hard landing, CBA said.

“We continue to expect 50bp of rate cuts in Q4 23 and a further 50bp of easing in H1 24,” the bank said.

Moody's Analytics said it expected another hike in March.

“As for April, data showing the impact of previous rate hikes on consumer and business spending is likely to keep board members on their toes when it comes to a subsequent rate hike,” associate economist Illiana Jain said.

The RBA's Mr Lowe said below average growth was expected this year and next.

He said the outlook for the global economy remained subdued.

“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand," Mr Lowe said.

“The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. 

“Medium-term inflation expectations remain well anchored, and it is important that this remains the case.”

Mr Lowe said wages were continuing to pick up.

But he warned the bank must focus on inflation, despite the likelihood of a slowing economy.

“High inflation makes life difficult for people and damages the functioning of the economy,” he said.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. 

“The board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

Inflation fight

The rate hike cycle has been the sharpest in decades after the Reserve Bank was caught wrong-footed when inflation began to rise in 2022.

It means borrowers will be paying a full 3.25 percentage points more on their debts than this time last year.

Hike number nine comes after inflation hit a fresh high in the year to December, at 7.8 per cent nationally.

The latest data from the Australian Bureau of Statistics showed prices were increasing across a variety of goods and services for Perth customers, including pet food, cereals, new houses, and motor vehicle parts.

It’s been a similar story in much of the developed world.

The United States Federal Reserve lifted its funds rate to a band of 4.5 per cent to 4.75 per cent earlier this month.

That came after inflation hit double digits in the world’s biggest economy last year, with the rate of price increases since slowing to 6.5 per cent.

The Bank of England has set its base rate at 4 per cent, while inflation in that country is running at 11.5 per cent.

The surging inflation across the world came after major stimulus was released across major economies during the pandemic, including higher government spending, lower interest rates and money creation.

That led to falling unemployment across the world, with Australia's jobless rate hitting the lowest level in 48 years.

At the same time, supply chain issues started to hit businesses, while early last year, the war in Ukraine added to the pressures.