RBA makes cash rate call amid ‘overkill’ concerns

RBA inflation interest rates rate hike Phil Lowe

7 February 2023
| By Charbel Kadib |
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The Reserve Bank of Australia (RBA) has continued its monetary policy tightening strategy, actioning the ninth hike to the official cash rate in less than a year.

After meeting on Tuesday (7 February), the central bank’s monetary policy board decided to lift the cash rate by a further 25bps to 3.35% — the highest since September 2012.

In his statement, RBA governor, Philip Lowe, said this was unlikely to be the last raise.

"The board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and this period of high inflation is only temporary. In assessing how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market."

The tightening cycle aimed to subdue inflationary pressures, with the central bank endeavoring to return annualised inflation to a target range of 2%-3%.

This came just weeks after the latest quarterly consumer price index (CPI) reported annualised inflation of 7.8% in the year to 31 December 2022 — the highest since 1990.

However, key market indicators were pointing to a rapid easing in inflationary pressures, reflected in notable declines in consumer spending activity.

But the RBA needed to see “sustained evidence of a cooling economy” before pausing its tightening cycle, according to Anneke Thompson, chief economist at CreditorWatch.

Thompson said the RBA’s next rate move would depend on January’s retail trade figures, scheduled to be released on 28 February.

“The December result showed a marked slowdown in consumer spending in all categories and states, with sales falling 3.9% month on month,” she observed.

“A fall in total sales was to be expected given that Black Saturday sales now make November the peak sales month, therefore January sales will be closely watched.

“Inflation also appears to be moderating, and we should see further drops in the rate of price growth as data is now being measured off 2022 figures, when price rises had already kicked in.”

Upcoming gauges of business confidence and conditions would also influence the RBA’s prospective cash rate calls, given weakness in the back-end of 2022.

“Overall, it appears the RBA’s efforts to slow the economy and cool inflation are working. How quickly and deeply this ‘cooling’ is felt by businesses will be key to determining what happens next to the cash rate,” Thompson added.

Lead economist at Oxford Economics, Adam Slater, warned the world’s central banks risked “overtightening”.  

“An uncertain environment means greater risk of policy errors, such as central bank monetary overkill,” he observed.

“The current monetary tightening cycle has been abrupt and looks large relative to historic norms and some policy rules.

“That, along with worrisome signals from key indicators, points to overtightening risk being potentially considerable.”

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