As expected the Reserve Bank raised its key cash rate for a 10th time – by 0.25% – to a forecast 3.6% but again signalled that at least one more rate rise is around the corner.
It was the second monetary policy meeting of 2023 and produced the second rate rise of the year, and a similar warning that more are on the way.
Some economists reckon another in April will see the central bank sit and wait for the rest of 2023, other more excitable types claim up to four more increases will be needed.
The 3.6% rate is the highest for the cash rate since 2012 and the news saw the ASX rise sharply, jumping 42 points in a matter of minutes after the 2.30pm announcement and ending up 36 points by the close at 7,364.70 but the Aussie dollar eased back towards 67 US cents.
“The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments,” Dr Lowe said in his usual post-meeting statement on Tuesday.
“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” Dr Lowe said in the final paragraph of Tuesday’s statement where future guidance is usually to be found after each monthly meeting.
“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that,” Dr Lowe added.
Dr Lowe is expected to elaborate on this statement in the speech in Sydney on Wednesday morning.
Dr Lowe reiterated on Tuesday that demand was still running too hot across Australia, but that the RBA would not pre-empt its future rate decisions and will consider upcoming economic data (jobs data for February on Thursday week is the next important release).
The RBA has hiked its interest rates target from a record low 0.1% back in May 2022 to 3.6% in its past 10 meetings.
AMP Chief Economist Shane Oliver says the RBA should now sit and wait, even though it has signalled a further rate rise or two.
“We think that the RBA has done enough and should now pause and that is our base case for next month. Continuing to raise rates from here risks plunging the economy into a recession.
“The run of recent data indicates that RBA rate hikes are getting traction with: weak jobs data; a plunge in consumer confidence back to recessionary lows; slower than expected wages growth; stagnant nominal retail sales since September (and falling retail sales in real terms); weaker than expected underlying December quarter GDP growth (absent net exports it would have gone backwards); and weaker than expected inflation in January.
“This is all against the backdrop of an ongoing plunge in building approvals and housing finance. Economic data can run hot and cold and seasonal adjustment issues may be playing a role but taken together the run of recent data suggests that demand is cooling and inflation has peaked,” Dr Oliver wrote on Tuesday afternoon after the decision.
“Given high inflation and RBA guidance, the risks are still skewed to the upside for interest rates. However, by year end or early next year we continue to see the RBA starting to cut rates,” Dr Oliver added.
