The RBA Board hiked rates by 50bps at today's meeting, lifting the cash rate target to 1.85% and the Exchange Settlement rate to 1.75%. This was the third consecutive hike of 50bps following the initial increase of 25bps in May. With rates still below the estimated neutral range and inflation now expected to reach a higher peak, further hikes remain in prospect.
The key message in today's decision statement from Governor Philip Lowe was that with inflation to keep climbing to reach a new forecast peak of 7¾% towards the end of the year, further rate hikes will be needed to ensure its return to the 2-3% target band "over time". Despite the RBA lowering the domestic growth outlook in 2022 from 4.2% to 3.25%, in part driven by a weakening global economy, the view of the Board is that the window to continue hiking remains open. Backing that assessment was the strength of the labour market, with the unemployment rate expected to fall further from its 50-year low of 3.5% based on the high level of job vacancies; household spending had been "resilient", business investment was on the rise and the terms of trade was supporting national income.
The RBA's outlook becomes much more nuanced in 2023. Although inflation is projected to slow sharply next year, it is forecast to remain above target at above 4% (revised up from 3.1% previously). At the same time, domestic growth is expected to slow sharply to 1.75% (down from 2%), leading to a modest uptick in unemployment to around 4% by the end of 2024. With the growth outlook made more uncertain due to global factors including the the Ukraine war, Covid in China and the impact of high inflation, today's statement noted the Board was treading a "narrow path" as it tightens monetary policy to lower inflation while also looking to keeping the Australian economy on an "even keel".
Looking ahead, the Board reiterated that there are further steps to be taken in "normalising monetary conditions". Markets are priced for one final 50bps hike in September, followed by a pivot back to 25bps increases in October, November and December. The pricing for September looks justified in the context of the Board accelerating the return of the policy rate to the neutral range, estimated by the RBA to be around 2.5%. While the emphasis remains on the data flow, simply being close to neutral could be enough to trigger the October pivot markets look for.