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(CORRECTED)MNI RBA WATCH: Shifts Hawkish, Targets Services

(MNI) Sydney

(Corrects "removing "will"" to "removing "may well"")

The Reserve Bank of Australia raised its cash rate lift by 25 basis points to 3.85%, stressing that it aimed to return inflation to its 2-3% target in a "reasonable timeframe" and strengthening language on future hikes.

RBA Governor Philip Lowe said in the accompanying statement that “further tightening may be needed”, removing “may well” from its April text, and signalling acceptance that a more aggressive policy stance will be needed to quell inflation.

Markets had expected a pause and the overnight index swap rate had priced a 3.6% peak, however, the Reserve’s decision rested on a coin flip leading into today’s meeting as it weighed high inflation and the tight labour market. (See MNI RBA WATCH: Jobs Caution, Inflation Set Up Rates Coin Flip)

The RBA’s move saw the OIS reprice swiftly, with markets now expecting a 4% peak by October. The move also lead to a sharp selloff in ACGBs and three-year and 10-year futures falling as much as 22bp and 14bp (see: Sharply Cheaper, RBA Hawkish Again On Inflation). The decision to raise the cash rate takes the cumulative increase over the last 12 months to 375bp.


The RBA expects inflation will take time to return to target, with the central forecast predicting CPI at 4.5% in 2023 and 3% in mid-2025, while it expects GDP to grow 1.25% in 2023 and 2% in 2024 and by mid-2025. MNI previously reported the RBA was aiming for a mid-2025 return to target with the unemployment rate between 4-4.5%.

While the Reserve welcomed recent data that showed inflation was continuing its downward trend, Lowe said it was still high and the hike would help keep medium-term inflation expectations “well-anchored”. He pointed to services inflation as particularly pertinent, noting that experience overseas pointed to upside risks. “Unit labour costs are also rising briskly, with productivity growth remaining subdued,” he added. The outlook for household consumption also continues to remain a significant source of uncertainty.


While inflation has fallen, it has proved sticky, particularly on sectors less impacted by interest rates, such as the rental market. National house prices have also risen for the last two months – further evidence the RBA needed to do more to constrain the economy. The RBA’s hawkish shift will also placate critics, many former staffers, who noted an interest rate above 4% was likely needed to pull inflation lower.

In his statement, Lowe said further tightening would depend upon how the economy and inflation evolve. More on the Reserve’s thinking will be known when Lowe delivers a speech at a Board dinner tonight. An updated set of economic forecasts will also be published in the May Statement on Monetary Policy this Friday.

Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.
Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.

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