RBA Newsflash: May 2023

Updated May 2nd 2023

After the Reserve Bank of Australia (RBA) decided to pause the cash rate for the month of April at 3.60%, the central bank has now made the decision to once again raise the official cash rate, hiking it by 25 basis points (bps) to 3.85% in May.

This marks the 11th rate rise since the rate-hiking cycle began last year (May 2022).

It marks the highest level the official cash rate has been since April 2012, when the cash rate sat at 4.25%.

The RBA indicated last month that a further hike in May was still a possibility, but would wait on further information regarding inflation, monthly readings on the labour market, household spending and business conditions and further developments in the global economy and financial markets.

The March quarter consumer price index (CPI) figures were anticipated to be a determining factor in the central bank’s decision as it remained firm on dropping inflation to the target range of 2-3%.

Speaking of the decision to raise rates again, RBA governor Philip Lowe said today Tuesday (2 May): “Inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range. Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.

“The board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook. While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4.5% in 2023 and 3% in mid-2025.”

Despite the latest monthly inflation read and the official CPI data confirming inflation peaked in December and indicating the momentum in inflation pressures is subsiding, inflation remains elevated and is well above the Reserve Bank’s 2-3% target range.

Together with the lift in employment seen in the most recent update on the Labour Force, the labour market remains tight. This gave the RBA headroom to further raise the cash rate”.

As the RBA continues to be concerned about services inflation, the board increased the cash rate “in order to strip more demand from the Australian economy”.

Despite the CPI figures revealing that inflation fell from its almost 30-year record high of 7.8% to 7%, the Commonwealth Bank of Australia retained its call for the RBA to increase the cash rate.

However, the major bank acknowledged that the decision would be “a very close call” and ascribed a 55% chance of a rate increase, and a 45% chance of hold.

The remaining major banks – Westpac, ANZ and NAB  – all adjusted their terminal rate forecast to 3.60% per cent following the release of the March quarter CPI figures, expecting that the drop in inflation would be enough for the RBA to cease its tightening cycle for the month.