The RBA delivered its third consecutive rate hike today, lifting the cash rate by 25bps to 4.35%. An 8-1 (hike-hold) vote from the Monetary Policy Board made this a notably more decisive outcome than the 5-4 split in March. With all three of the rate cuts from 2025 now reversed, Governor Bullock said the cash rate was now 'a bit restrictive', while her remarks at the press conference placed greater weight on the downside risks to growth and the labour market than at any stage in this tightening cycle. The RBA's latest forecasts in the Statement on Monetary Policy deteriorated in response to the recent energy price shock from the Middle East conflict. Inflation is now expected to peak higher later this year (4.8% headline and 3.8% core), while tighter monetary policy has lowered the growth outlook. Markets now expect the RBA to pause but still price in at least one further hike by year-end.
Today's statement noted the Board's decision to hike reflected the assessment that inflation was likely to remain above target for some time, while there were upside risks to inflation expectations. Inflation has risen markedly since the middle of last year to be above the 2-3% target band. The Board's view is that this largely reflects excess demand, which it has sought to cool by hiking the cash rate three times this year. The complication is that surging energy prices are delivering a new inflationary impulse.
Although it is only early days, the RBA has seen enough indications that energy price shock is likely to spill over into inflation more broadly, so called second round effects. At the press conference, Governor Bullock said that businesses looking to pass-through higher energy prices was reasonable. Her key concern was that if demand was to remain robust, they might be emboldened to push through even larger price rises that could then establish a new norm.
The Statement on Monetary Policy included the RBA's updated view on the outlook in light of the energy price shock. Headline inflation was now expected to peak at 4.8% in headline terms in the June quarter (up from 4.2%), and core inflation was seen rising to 3.8% (up from 3.7%). That largely reflects the impact of higher oil prices, marked up to just above US$100/bbl from the low $60s in the February forecasts. With the RBA using the market curve for interest rates, the assumption for the cash rate in the latest forecasts was 50bps higher than in February. As a result, the growth outlook this year was cut from 1.8% to 1.3% and then to 1.4% in 2027 from 1.6% previously. Below trend growth puts upward pressure on the unemployment rate through the enxt couple of years.
The key difference at today's press conference was that Governor Bullock said the Board was attentive to risks on both side of its forecasts. In February and March, it was almost exclusively concerned about upside risks to inflation. But with rates having been hiked three times now, more focus has shifted to downside risks to growth and the labour market. That shift was interpreted by markets as indicating a pause from the RBA is now likely, allowing itself time to assess the situation. The next monetary policy meeting is on 15-16 June.
