Further tightening may be required as house prices rise

The Reserve Bank of Australia (RBA) has lifted the cash rate by 25 basis points (bps) to bring the official cash rate to 4.1 per cent from 3.85 per cent. This is now the 12th cash rate hike since the RBA began raising rates in May 2022.

This is the first time the official cash rate has sat above 4 per cent since April 2012, when it was at 4.25 per cent.

RBA governor Philip Lowe said on the decision: "The Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one. A significant source of uncertainty continues to be the outlook for household consumption."

"The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances."

Mr Lowe continued: "Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.

"The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."

CreditorWatch chief economist Anneke Thompson said the RBA lifted the cash rate in an effort to combat services side inflation “despite clear signs that the Australian economy is well and truly into its necessary slowdown”.

“There were one off reasons for the high inflation figure, such as the fuel excise tax being halved in April 2022, that contributed, however, overall, it would appear that inflation is not falling fast enough for the RBA to be comfortable with,” Ms Thompson added.

PropTrack senior economist Eleanor Creagh said: “The pipeline of wage increases in the public sector and minimum wage decision are expected to maintain wages pressure, potentially fuelling inflation to remain elevated.
“The risk of a wage-price spiral is an ongoing concern for the central bank.”

CoreLogic Australia head of research Eliza Owen said: "A mix of outcomes across economic data through the month created another ‘line-ball’ call for the outlook in the cash rate."

"Adding to uncertainty around interest rate decisions is the housing market dichotomy.

"CoreLogic’s Home Value Index accelerated in May, rising 1.2 per cent nationally and while established home and residential land values do not directly feed into the CPI housing indicator, there may be upside risk to inflation from rising home prices due to potential wealth effects," Ms Owen added.

Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird said the central bank's tightening cycle has been "incredibly aggressive".

"The Board has delivered 400bp of rate hikes since May 2022.

The major banks tentatively predicted a hold in the cash rate at 3.85 per cent for June, however there was widespread expectation that the bank would have to raise rates in the coming months. For example, ANZ's head of Australian economics, Adam Boyton, stated the bank expected a rate rise in either June or July - but that a move would most likely come in August.

ANZ updated its terminal cash rate to 4.35 per cent (up from 4.1 per cent) in the lead up to today’s decision, saying that August would be the month “most likely for a move”.

It comes after RBA board members last month agreed that “further increases in interest rates” could still be required, depending on how the economy and inflation evolve.

Furthermore, Mr Lowe voiced more concerns about inflation risks, particularly relating to wages.

The latest consumer price index (CPI) data, for the month of April, released by the Australian Bureau of Statistics (ABS) last week indicated that inflation rose to 6.8 per cent over the 12 months leading to April.

This data surprised several economists as they expected the RBA to hold the cash rate in June as a result of weak economic growth and various indicators showing signs of weakness.

According to the ABS’s latest business indicators data, wages and salaries rose 1.8 per cent during the March 2023 quarter, while the Fair Work Commission decided that award rates of pay will increase by 5.75 per cent as of 1 July 2023.

More to come.

[RELATED: Banks predict rate pause for June]