Reserve Bank of Australia hikes cash rate by 25bp, inflation still ‘too high’

Philip Lowe, Governor of the Reserve Bank of Australia. Photo / NZME

The Reserve Bank of Australia has lifted its cash rate by another 25 basis points to 4.1 per cent today as it digs into its fight against inflation.

The latest hike is the 12th by the RBA in just over a year.

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” RBA Governor Philip Lowe said in a statement today.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.

“If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”

Inflation bounced back up to 6.8 per cent in the year to April, higher than the 6.3 per cent annual rise recorded in March.

Lowe said recent data indicated “the upside risks to the inflation outlook have increased”, prompting today’s increase.

“While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued,” he said.

“Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated. Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.”

The RBA’s target range for inflation remains 2 to 3 per cent, but the path to achieving a soft landing “remains a narrow one” Lowe said.

Lowe didn’t rule out further monetary policy hikes in the future.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve,” he said.

“The board will continue to pay 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.”

Today’s latest increase in the cash rate brings it up from a low of 0.1 per cent in November 2020. The RBA had halted rate hikes in April this year – leaving the cash rate at 3.6 per cent – but has since resumed with two consecutive 25bp lifts.