Rate relief for now but hikes still a risk
The Reserve Bank has spared borrowers fresh pain, but households crunched under the cost of living risk facing further rate hikes.
In a statement announcing the decision to keep rates on hold at 4.35 per cent, the RBA board said despite recent progress on lowering inflation, it remained high.
“The board expects that it will be some time yet before inflation is sustainably in the target range,” the statement read.
“The path of interest rates that will best ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks.”
But the central bank said rates could still go higher, and “a further increase in interest rates could not be ruled out”.
RBA’S NEW FORECAST FOR INFLATION
In fresh forecasts simultaneously released by the RBA, the bank’s economists slashed their near-term inflation projections, citing the easing of supply chain blockages and consumers spending less as they are crunched by the soaring cost of living.
To the relief of households, headline inflation is expected to decline a little quicker than previously thought, easing to just 3.3 per cent by mid-year – a significant reduction from the RBA’s September projection of 3.9 per cent.
But price pressures for services such as hairdressing, pet grooming and car repairs will be far stickier, which the RBA expects will ease much more gradually than goods.
“Recent high inflation outcomes reflect the still-strong level of demand for services as well as strong growth in domestic costs,” the statement read.
These costs included wages, insurance and administrative costs, which would be subsequently passed through to consumers, it said.
In the second half of 2025, inflation will return to the RBA’s 2-3 per cent target band, easing to 2.8 per cent by December, it forecasts.
The RBA’s preferred measure of price growth, trimmed mean inflation, which strips out volatile items such as fuel and groceries, is also expected to ease faster than previously anticipated, slowing to 3.3 per cent in June, down from 3.9 per cent in previous projections.
Even as updated forecasts show the jobs market will remain “robust”, the unemployment rate will rise to 4.4 per cent, up from its current rate of 3.9 per cent.
Pay packets are expected to grow slightly faster in the nearterm, rising by 4.1 per cent in first half of 2024, with workers set to enjoy real wages growth over the next couple of years.
But the rate of wages growth will drop away as the jobless rate rises, the RBA expects.
“Wages growth has already begun to moderate in some parts of the private sector and the moderation is expected to deepen and broaden out over the coming year,” it said.
Driven by real income growth, household consumption is expected to return to its pre-pandemic levels in the next year or so.
Tuesday’s cash rate call marks a new era for the RBA, which will now hold eight, two-day board meetings a year, simultaneously release fresh forecasts with the decision and hold a post-meeting press conference. The changes follow an independent review of the RBA that recommended measures designed to improve the bank’s communications and internal deliberations.
ECONOMY COOLS AHEAD OF CASH RATE CALL
In the past 20 months, the RBA has aggressively tightened monetary policy as it works to cool the economy and tame inflationary pressures that surged during the pandemic on the back of supply chain disruptions, labour shortages and surging aggregate demand.
But under the weight of 13 rate hikes and severe cost-ofliving pressures, the economy has sharply deteriorated.
Fresh retail trade data showed consumer spending plunged in December, while the jobs market shed more than 65,000 positions.