25bp Hike, Unchanged Guidance Points To More Tightening Ahead

The RBA surprised markets and most analysts again with a 25bp hike bringing rates to 4.1%, a cumulative 400bp of tightening this cycle. There were few changes to the statement and the final guidance paragraph was the same as May’s. This indicates that the central bank has not finished and further moves in the months ahead are highly likely. The details of Q1 GDP and no major change in the monthly data could mean another move on July 4. Sticky services prices may drive an extra hike at the August 1 meeting.

• RBA Governor Lowe speaks on Wednesday June 7 at 0920 AEST and Deputy Governor Bullock at 0950 AEST. This should provide more clarity around the decision.
• Increased upside inflation risks and growing concerns regarding meeting the inflation target by mid-2025 drove today’s tightening. The Board noted that “this further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.” – implying that before the move they weren’t confident that this would happen. It probably also means that more is needed to make them “confident”.
• While wages growth is still consistent with the inflation target, higher public sector wage growth and the higher than last year’s award wage increase were noted. The risks from low productivity growth and strong unit labour costs were reiterated.
• The RBA no longer feels that inflation expectations are “well anchored”, as this was removed from the statement, and it will continue to monitor wage and price setting behaviour closely.
• The account provided more details as to why high inflation is so damaging and it seemed to speak to criticism regarding the impact on low-income households by saying that it “worsens income inequality”.
• Uncertainties around the consumer remain and most of the observations re this sector were unchanged. But instead of falling house prices weighing on consumption, the RBA observed that that they are rising again.
• See statement here.