As expected, the Reserve Bank has failed to hold its nerve and lifted its cash rate by 0.25% to 4.35%. It is the first rate rise overseen by the new Governor, Michell Bullock, and came at the second RBA board meeting she presided over.
Markets had anticipated the cash rate increase at this meeting, especially the big four banks, which all see the opportunity to extend the benefit of their stronger net interest margins in the wake of the succession of RBA rate rises since early 2022.
The rate rise was widely expected after the September quarter consumer inflation data came in slightly stronger than expected, along with the monthly inflation indicator for September.
Ms. Bullock had mentioned the surprise 'stickiness' of inflation, especially in the cost of services, in the September quarter and attributed some of the blame to higher oil prices and the potential embedding of these prices in the economy and consumer expectations (which hasn't happened as yet).
In her post-meeting statement, Ms. Bullock made it clear that inflation would be her and the bank's primary concern going forward.
The announcement caused the Aussie dollar to lose a quarter of a US cent in trading after the 2:30 pm announcement, but the ASX 200 jumped 14 points.
She said in her post-meeting statement, "Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly."
"Since its August meeting, the Board has received updated information on inflation, the labour market, economic activity, and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased.
"While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased, but they remain tight. Housing prices are continuing to rise across the country."
"Returning inflation to the target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
"And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target, and it is important that this remains the case.
"In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, 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 outcome."
