MNI BRIEF: RBA Hikes 25bp to 3.35%, Further Increases "Needed"

The Reserve Bank of Australia warned it expects more rate hikes will be "needed" after lifting rates by 25bp to 3.35% as it forecast a decline in inflation to "around" 3% by mid-2025.

The ninth consecutive hike - and fourth consecutive 25bp tightening - pushed rates to their highest level since 2012 and delivered cumulative tightening of 325bp since the first hike in May. The hike was in line with market expectations.

The statement highlighted the RBA's ongoing concerns with inflation that was assessed as "very high" compared to "too high" in December. The Consumer Price Index rose 7.8% y/y in Q4. "The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary," the statement said.

The CPI forecast for 2023 was maintained at 4.75% before declining in mid-2025 to around 3% - the top end of the RBA's 2-3% inflation target.

The bank stiffened its tone around inflation expectations, noting that "if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later." The statement cautioned that "strong domestic demand is adding to the inflationary pressures".

The strong jobs market is supporting households despite higher rates. The RBA maintained its forecast for unemployment to edge up to 3.75% by the end of the year before rising to 4.5% by mid-2025. Wages growth was expected to "further pick-up".

The RBA dumped its language around not being on a "pre-set course" but reiterated its language about a "narrow" path between controlling inflation and supporting growth. The RBA said rate hikes would depend on developments in the global economy, trends in household spending and the outlook for inflation and the labour market. The Australian dollar rallied after the decision. (See AUD : A$ Higher On RBA, Further Rate Hikes Likely In Coming Months)