The RBA hiked rates by a further 25bps at today's meeting bringing the cash rate target to 4.1% (and the rate on ES balances to 4%). The outcome of today's meeting was seen roughly as a 50/50 call between no hike or a 25bps increase. It follows the 25bps hike at the May meeting where markets were fully priced for the Board to remain on hold. In light of upside risks to the inflation outlook in Australia, today's hike was said to provide the Board with "greater confidence" of a return to the 2-3% inflation target band within a "reasonable timeframe".
Today's decision was the 12th rate hike in the current tightening cycle, the cash rate rising 400bps since April last year. In my preview, I outlined my view that the Board would leave rates unchanged today to give it more time to assess developments, but the RBA in its hawkish mood had other ideas.
Rising interest rates are leading to an increasingly challenged growth and inflation trade-off for the RBA. Governor Philip Lowe's statement reiterated the Board continues to aim to keep the economy "on an even keel", but it was noted that growth has slowed and labour market conditions have eased. Higher interest rates and cost-of-living pressures are driving "a substantial slowing in household spending".
However, the RBA has clearly turned more hawkish since it "skipped" hiking rates at the April meeting. Today's statement noted, "Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this". This is in reference to rising services inflation and upward pressure on labour costs, with concern that sufficient gains in productivity may be lacking to offset the inflationary risk from faster wages growth. The 5.75% increase to award pay in Australia in 2023/24 announced by the Fair Work Commission last Friday was noted to be "higher than it was last year".
In looking ahead, the Governor's statement highlighted that the Board would maintain close surveillance on wage and price-setting behaviour. The Board has maintained the guidance that "... further tightening may be required" conditional on how the economy and inflation evolves. After today's decision, markets have repriced the RBA peak rate higher, largely expecting an additional hike to come by August.
