Cash rate hits 11-year high

The central bank has made the decision to once again raise the official cash rate, hiking it by 25 basis points (bps) to 3.85 per cent in May. 

This marked the 11th rate rise since the rate-hiking cycle began last year (May 2022) and comes after the Reserve Bank of Australia (RBA) decided to pause the cash rate for the month of April at 3.60 per cent.

This is the highest level the official cash rate has been since April 2012 (when the cash rate sat at 4.25 per cent) and the first time Australia has had a cash rate of 3.85 per cent. 

The RBA indicated last month that a further hike in May was still a possibility but would wait on further information regarding inflation, monthly readings on the labour market, household spending and business conditions, and further developments in the global economy and financial markets.

The March quarter consumer price index (CPI) figures were anticipated to be a determining factor in the central bank’s decision as it remained firm on dropping inflation to the target range of 2–3 per cent.

Speaking of the decision to raise rates again, RBA governor Philip Lowe said on Tuesday (2 May): “Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable time frame, the board judged that a further increase in interest rates was warranted today.

“The board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. 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.”

CoreLogic research director Tim Lawless said the decision was always "going to be a line ball", however it is likely the last in the RBA's most rapid hiking cycle to date. 

"Although inflation has been trending lower since peaking in the December quarter 2022, today’s rate hike reflects the RBA’s uncertainty about how ‘sticky’ inflation might be amid persistently tight labour markets and new evidence that housing prices have moved through their low point.

"Time will tell whether the latest rate hike is enough to send the recent positive trend in home values into reverse, however our anticipation is the market will continue to level out on the expectation that interest rates have peaked and the imbalance between housing demand and supply will persist for some time yet," Mr Lawless added. 

PropTrack senior economist Eleanor Creagh said: “Despite the latest monthly inflation read and the official CPI data confirming inflation peaked in December and indicating the momentum in inflation pressures is subsiding, inflation remains elevated and is well above the Reserve Bank’s 2–3 per cent target range.

“Together with the lift in employment seen in the most recent update on the Labour Force, the labour market remains tight. This gave the RBA headroom to further raise the cash rate.”

CreditorWatch chief economist Anneke Thompson said as the RBA continues to be concerned about services inflation, the board increased the cash rate “in order to strip more demand from the Australian economy”.

Despite the CPI figures revealing that inflation fell from its almost 30-year record high of 7.8 per cent to 7 per cent, the Commonwealth Bank of Australia retained its call for the RBA to increase the cash rate.

However, the major bank acknowledged that the decision would be “a very close call” and ascribed a 55 per cent chance of a rate increase and a 45 per cent chance of a hold.

The remaining major banks — Westpac, ANZ, and NAB — all adjusted their terminal rate forecasts to 3.60 per cent following the release of the March quarter CPI figures, expecting that the drop in inflation would be enough for the RBA to cease its tightening cycle for the month.

More to come.

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