MNI STATE OF PLAY: Rate Rises Not "Pre-Set" As RBA Hikes 50bps

The Reserve Bank of Australia says that it is “not on a pre-set path” of interest rate rises and sees inflation returning to target in 2024 after peaking at 7.75% this year.

The new language around the pace of monetary tightening came as the central bank, as forecast, hiked official interest rates by 50 basis points to 1.85%, the fourth consecutive increase since May, (See: MNI BRIEF: RBA Hikes 50bps, Sees Inflation At 7.75%).

While saying it remains committed to “doing what is necessary” to return inflation to the 2% to 3% target range “over time,” the Tuesday RBA statement continued the bank’s approach of abandoning forward guidance and being guided by data and its assessment of the outlook for inflation and the labour market.

Second quarter CPI inflation printed at a two decade high of 6.1% while trimmed mean inflation, the RBA’s preferred measure, is at 4.9%, (See: MNI STATE OF PLAY: Lower Inflation Print Could Limit RBA Hike). Unemployment is at a 50 year low of 3.5% but wage increases are lagging inflation.

PEAK THIS YEAR

The RBA continues to believe that inflation will reach its peak this year before subsiding as supply chain issues are resolved and interest rate rises have an impact on consumer spending.

While some of the supply chain issues are global, others are local and have been caused by widespread flooding on the Australian east coast earlier in the year.

“Medium term inflation expectations remain well anchored, and it is important that this remains the case,” the RBA statement said.

Also today, the RBA downgraded its growth forecast to 3.25% this year, and to 1.75% for 2023 and 2024. In the May Statement on Monetary Policy (SoMP), the RBA forecast 2022 growth at 4.5%.

More on the RBA’s outlook and forecasts will be known on Friday, when the bank publsihes an updated SoMP.