MNI BRIEF: Inflation Drives RBA Hike, Won't Re-Invest Bonds

The Reserve Bank of Australia has a cited a higher than expected increase in inflation in its decision to increase official interest rates for the first time in more than a decade on Tuesday by 25bps to 0.35%.

Underling inflation is now at 3.7%, outside of the RBA’s 2% to 3% target range for the first time in more than ten years, and the central bank is now forecasting it will reach 4.75% this year, see: MNI STATE OF PLAY: RBA Ponders Election-Eve Rate Rise.

"The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time. This will require a further lift in interest rates over the period ahead," the RBA statement said, adding that wages gains were noted.

"The Bank's business liaison suggests that wages growth has been picking up. In a tight labour market, an increasing number of firms are paying higher wages to attract and retain staff, especially in an environment where the cost of living is rising."

The RBA’s most recent Monetary Policy Statement, released in February, forecast underlying inflation at 3.25% in June, and then forecast a fall back to 2.75% by the end of the year. Fresh forecasts will be released in the next MPS this Friday.

The RBA announced that it will not reinvest the proceeds of maturing government bonds purchased during the recent bond buying program, with the expectation that the bank’s balance sheet will decline significantly in coming years.

The RBA is not currently planning to sell government bonds purchased during the pandemic, saying some withdrawal of the recent “extraordinary monetary support” is now appropriate.