The Reserve Bank of Australia has increased the official cash rate by 25 basis points to 3.85%, saying inflation is still too high.
The Reserve Bank of Australia board announced this afternoon that it will increase the cash rate target by 25 basis points to 3.85%, saying while inflation has passed its peak, 7% is “still too high” and it will be some time before it is back in the target range.
There was a brief reprieve just before Easter last month when the RBA decided to hold the cash rate at 3.6% for April. The brief hiatus in rate rises followed 10 consecutive hikes by the official bank. You can read more about last month’s decision in Forbes Australia.
RBA Governor Philip Lowe said that while the board had paused increases last month in order to “provide additional time to assess the state of the economy and the outlook”, it is now time to increase rates again “given the importance of returning inflation to target within a reasonable timeframe”.
“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4½ per cent in 2023 and 3 per cent in mid-2025,” he said in a statement.
The RBA board said that while goods price inflation is slowing due to a better balance of supply and demand, services price inflation is still very high and broadly based and the experience overseas points to upside risks. Also, it said the labour market remains tight, with the unemployment rate at a near 50-year low.
“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, involving even higher interest rates and a larger rise in unemployment.”
Changes afoot at RBA
The announcement comes less than two weeks after the release of recommendations for an official review of the RBA and the operation of monetary policy. You can read the full report here.
The review recommended that the RBA should meet less frequently and decisions about the official cash rate should be made by a new board, including independent experts. It also recommended a clearer monetary policy framework, with clear objectives and tools and a “well-defined financial stability role” and the establishment of a Monetary Policy Board and Governance Board – supported by better processes and greater transparency around decisions. It also pushed for a more “open and dynamic RBA” with an open culture for constructive debate.
The Federal Government says it agrees, in principle, with all the recommendations of the review – the first of its kind in 40 years. It will now work with the central bank, parliament and other stakeholders to implement them.
Federal Treasurer Jim Chalmers said that while the review found the RBA had “contributed to good economic outcomes over the past three decades”, the review did “find a number of opportunities to strengthen it”.
“Australia faces a complex and rapidly changing environment, and we need the most effective central bank and monetary policy framework to meet current and future economic challenges,” Chalmers said.
RBA Governor Philip Lowe said the RBA welcomes the recommendations of the review
“The recommended changes will build on that strong foundation and strengthen the Bank’s governance and decision-making processes. They will help us deal with the complex world in which we operate as we strive to promote the economic welfare of the Australian people,” he said.
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