Surprise Hike To Return Inflation To Target, Tightening Bias Retained

The RBA hiked rates 25bp to 3.85%, bringing cumulative tightening to 375bp, after pausing in April to gather more information on economic developments. The Board was generally expected to keep rates at 3.6% following Q1 CPI data showing headline and underlying inflation easing but expectations were not unanimous. The meeting statement is little changed apart from the addition of some of the revised forecasts and importantly the emphasis that inflation return to target in “a reasonable timeframe”. The tone seemed to shift towards a greater concern regarding inflation and that it won’t reach 3% when expected.

• The RBA retained its tightening bias as “some further tightening of monetary policy may be required” and that will depend on “how the economy and inflation evolve”. Thus, it has kept its options open and meeting decisions remain very data dependent. The May 9 budget and May 17 Q1 WPI plus the monthly data will be important inputs into the June 6 decision.
• The Board observed that inflation had peaked but it is “too high” and it “will be some time yet” before it reached the top of the target band, which is still expected to be in mid-2025. It was the importance of achieving this that drove the latest hike. Today’s move was also highlighted as helping to ensure that high inflation didn’t become “entrenched”.
• It appears that they are concerned that due to broad-based and elevated services prices, inflation could be sticky on the way down, as has been the “experience overseas”. But end-2023 CPI forecasts have been revised down to 4.5% from 4.8%.
• It also points out the risk to prices from wages and lacklustre productivity by stating “unit labour costs are also rising briskly, with productivity growth remaining subdued”. It is alert to the risk of a wage-price spiral, especially given the tight capacity and low unemployment in Australia. The forecast unemployment rate in mid-2025 is unchanged at around 4.5%.
• Growth is expected to stay positive but below trend and forecast to be 1.25% this year (revised down) but around 2% y/y in mid-2025, which has been revised up. Further forecast details will be published in Friday’s Statement on Monetary Policy.
• RBA Governor Lowe will speak at the RBA Board Dinner in Perth today at 2120 AEST. It can be listened to live at this link.