Ten in a row: RBA continues hiking cycle
The Reserve Bank of Australia’s (RBA) monetary policy board has lifted the official cash rate by a further 25bps to 3.6% — the tenth consecutive increase since May 2022.
The rate increase formed part of the RBA’s “narrow path” strategy, which aimed to curb elevated inflation without triggering a local recession.
This month’s decision came as no surprise to markets, with RBA governor Philip Lowe recently reiterating the board’s view that inflation was “way too high”.
Minutes from last month’s board meeting noted “further increases in interest rates are likely”, with many observers expecting this month’s hike to be proceeded by two additional increases in the coming months.
The RBA’s hawkish outlook came off the back of stronger than expected inflation data over the December quarter of 2022 (7.8% annualised).
However, recent indicators suggest the economy is weakening, prompting some observers, including AMP Capital chief economist Shane Oliver, to claim the RBA may have “over-reacted” to the December quarter inflation result.
The Australian Bureau of Statistics’ (ABS) latest monthly consumer price index (CPI) reported annualised inflation of 7.4% in January — well below market expectations of 8.1%.
This represented a 1% decline on the previous month, in which annualised inflation grew 8.4%.
Meanwhile, wages grew 0.8% in the three months to 31 December, slowing from 1.1% in the previous quarter and falling below market expectations of a 1% rise.
This coincided with weakness in aggregate economic activity, with GDP growth slowing to 0.5% over the fourth quarter of 2022 — below market expectations of 0.8%.
The December quarter result took annualised GDP growth to 2.7%.
Commenting on the RBA’s latest cash rate call, Anneke Thompson, chief economist at CreditorWatch, said this latest 25bps hike would be a “serious drag” on both consumer and business sentiment.
“CreditorWatch’s Business Risk Index continues to point to businesses acting in an increasingly cautious manner,” Thompson said.
“Data from February 2023 shows that credit enquiries in February 2023 were more than double those in February 2022. This is despite average trade receivables per data supplier decreasing by 10% year-on-year in February 2023.
“Businesses are clearly more concerned about the financial stability of the businesses they are trading with, given the economic conditions and large decline in consumer sentiment.”
Markets were expecting further tightening over the coming months, with three of the big four banks projecting a terminal rate of 4.1%.
AUTHOR
Charbel Kadib
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