RBA Newsflash: November 2023

Updated November 7th 2023

RBA calls Cup Day rate decision

The Reserve Bank of Australia (RBA) has announced its decision to lift the official cash rate by 0.25% from 4.1% to 4.35%. This cash rate hike followed four consecutive holds beginning in July 2023, and now sits at its highest point since November 2011.

The November monetary policy meeting has marked the second board meeting for RBA governor Michele Bullock following the departure of Philip Lowe in September 2023.

Governor Bullock stated: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks.”

“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.”

Ms Bullock noted there are still “significant uncertainties” around economic outlook, particularly regarding persistent overseas services price inflation, the lags effect of monetary policy and the outlook for household consumption.

She said many households are “experiencing a painful squeeze” on finances “while some are benefiting from rising housing prices, substantial savings buffers and higher interest income”.

The central bank’s decision to resume its monetary policy tightening was almost unanimously expected by bank economists, however, the wider market was split down the middle, with 50% calling no change in the cash rate and 50% calling an increase of 0.25%.

The decision to lift interest rates is likely to disrupt confidence and take some further heat out of the housing market rebound.

The lift in rates combined with ongoing cost of living pressures and alarming geopolitical environment is likely to weigh on consumer sentiment, which is already in deeply pessimistic territory.

Lower confidence could “act as a drag on housing market activity”, dampening buyer demand during a time when “advertised stock levels are rising across most regions”.

A rebalancing between buyer demand and advertised stock levels is likely to take some heat out of the housing upswing, which has already been losing some momentum, at least at a macro level, since the monthly rate of value growth peaked in May.

The RBA has taken the “controversial step” to raise interest rates once again while “some pockets of the economy are still seeing rampant price rises.

Unfortunately, the grim reality is the goods or services that are still recording high levels of inflation are not under any demand pressure, therefore this cash rate rise will have little impact on the prices of rents, fuel, insurance, and utilities.

Instead, this rise will be most burdensome for those businesses already at the coal face of the fight against inflation, such as the food and beverage, retail trade and construction sectors.

Demand in these sectors has already contracted, and higher interest rates will force consumers and potential home builders/renovators to further rethink their future spending decisions.

The latest Consumer Price Index (CPI) data “indicated that inflation would likely move lower and return to the Reserve Bank’s 2%-3% target range slower than was previously forecast.

In order to keep inflation expectations anchored and maintain confidence in returning inflation to the target range within a reasonable timeframe, the Reserve Bank lifted interest rates again today,” she said.

The RBA’s low tolerance rhetoric

The September quarter CPI increase of 1.2% along with the RBA noting in the October monetary policy minutes that it has adopted a “low tolerance for a slower return of inflation to target than currently expected” shifted forecasts from major bank economists.

However, during the Senate economics legislation committee on 26 October, Ms Bullock expressed that the board was not sure that the CPI figures represented any “material change” and was not prepared to state whether or not it would change the RBA’s inflation forecast and monetary policy.

Prior to the release of the CPI data, the general consensus among economists was the peak of the cash rate hikes had been realised at 4.1%.

Along with the updated cash rate predictions, the International Monetary Fund urged the RBA to recommence its monetary policy tightening in order to bring “sticky” and “high and persistent” inflation back towards the target range of 2%–3%.

Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential.