Reserve Bank keeps cash rate target unchanged as inflation continues to bite Australian families

On 3 May 2022, 18 days before the last federal general election, Reserve Bank Governor Philip Lowe announced that on 4 May the cash target rate was increasing from 0.0 per cent (where it had stood since 2 December 2020) to +0.25 per cent - a leap of 25 basis points.

For ordinary people life became increasingly miserable as major banks passed on the growing pain to loan/mortgage customers and big retailers rapidly piled on to see how far they could push price increases before the mutterings about rampant greed began to be heard.

The cash rate target did not stop increasing until 6 December 2023 when it did not move from 4.35 per cent. It has stood at that percentage to date.

The following Reserve Bank media release is not overly confident that cost of living pressures are going to end anytime soon even if the cash target rate does not move.

Media Release

Statement by the Reserve Bank Board: Monetary Policy Decision

Number 2024-15

Date 6 August 2024

At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent and the interest rate paid on Exchange Settlement balances unchanged at 4.25 per cent.

Inflation remains above target and is proving persistent.

Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance.

But inflation is still some way above the midpoint of the 2–3 per cent target range. In underlying terms, as represented by the trimmed mean, the CPI rose by 3.9 per cent over the year to the June quarter, broadly as forecast in the May Statement on Monetary Policy (SMP). But the latest numbers also demonstrate that inflation is proving persistent. In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters. And quarterly underlying CPI inflation has fallen very little over the past year.

The outlook remains highly uncertain.

The economic outlook is uncertain and recent data have demonstrated that the process of returning inflation to target has been slow and bumpy.

The central forecasts set out in the latest SMP are for inflation to return to the target range of 2–3 per cent late in 2025 and approach the midpoint in 2026. This represents a slightly slower return to target than forecast in May, based on estimates that the gap between aggregate demand and supply in the economy is larger than previously thought. In part, this reflects an increase in the forecast for domestic demand. But it also reflects a judgement that the economy’s capacity to meet that demand is somewhat weaker than previously thought, evidenced by the persistence of inflation and ongoing strength in the labour market.

There is substantial uncertainty around these forecasts. Revisions to consumption and the saving rate in the most recent National Accounts, high unit labour costs and the persistence of inflation – particularly in the services sector – suggest there are upside risks to inflation. Wages growth appears to have peaked but is still above the level that can be sustained given trend productivity growth.

On the other hand, momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure. And there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.

More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time of excess demand, and while conditions in the labour market remain tight.

There also remains a high level of uncertainty about the overseas outlook. The outlook for the Chinese economy has softened and this has been reflected in commodity prices. Some central banks have eased policy, although they remain alert to the risk of persistent inflation. Globally, financial markets have been volatile of late and the Australian dollar has depreciated. Geopolitical uncertainties remain elevated, which may have implications for supply chains.

Returning inflation to target is the priority.

Returning inflation to target within a reasonable timeframe remains the Board’s highest priority. This is consistent with the RBA’s mandate for price stability and full employment. To date, longer-term inflation expectations have been consistent with the inflation target and it is important that this remain the case.

Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range. Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.

The Board will rely upon the data and the evolving assessment of risks to guide its decisions. In doing so, it will continue to pay close attention to developments in the global economy and financial markets, trends in domestic demand, 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 outcome.

More on the August 2024 monetary policy decision...

Statement on Monetary Policy

The RBA's assessment of the economy that the Board considered in making its decision can be found at:

https://www.rba.gov.au/publications/smp/2024/aug/

Australian Bureau of Statistics, media release excerpt, 31 July 2024:

Quarterly CPI inflation

The most significant contributors to the June quarter rise were Housing (+1.1 per cent) and Food and non-alcoholic beverages (+1.2 per cent).

The quarterly growth in Housing was driven by Rents (+2.0 per cent) and New dwellings purchased by owner-occupiers (+1.1 per cent).

“The continuing tight rental market and low vacancy rates caused rental prices to go up 2.0 per cent for the quarter, following a 2.1 per cent rise in the March 2024 quarter,” Ms Marquardt said.

Higher labour and material costs drove the 1.1 per cent rise this quarter for construction of new dwellings. The increase follows a 1.1 per cent rise in the previous quarter.

The rise in Food and non-alcoholic beverage prices was driven by Fruit and vegetables (+6.3 per cent), Meals out and take away food (+0.6 per cent), and Meat and seafood (+1.3 per cent).

"Fruit and vegetable prices rose this quarter as unfavourable growing conditions drove higher prices for grapes, strawberries, blueberries, tomatoes and capsicums. This was the highest quarterly rise for Fruit and vegetables since 2016,” Ms Marquardt said.

Annual inflation measures

Annually, the CPI rose 3.8 per cent, with slightly higher annual inflation for both goods and services than in the March 2024 quarter.

“Prices rose for goods such as tobacco, new dwellings, automotive fuel and fruit. Annual services inflation continued to be impacted by higher prices for rents and insurance,” Ms Marquardt said........

Tweet of the Week

When interest rates went up “not only do we pay more to the banks for our mortgages, but the Reserve Bank, that we own, also forks out an extra billion dollars to them as well”

I have not been able to stop thinking about this @AlanKohler piece. pic.twitter.com/L1tufWgusw

— Craig Reucassel (@craigreucassel) November 20, 2023

Tweet of the Week

 

All we wanted for Christmas was a new Reserve Bank Governor. Be careful what you wish for! pic.twitter.com/l9rKtElfiy

— john shakespeare (@johnshakespeare) November 8, 2023

 

AUSTRALIAN SOCIETY STATE OF PLAY: Interest rates and cost of living - there is no good news in November 2023

Reserve Bank Logo

The Reserve Bank of Australia as one of its monetary policy decision tools employs a cash rate target.

In the Reserve Bank's own words:

The cash rate is the interest rate that banks pay to borrow funds from other banks in the money market overnight. It influences all other interest rates, including mortgage and deposit rates.

In technical terms, it is the interest rate on unsecured overnight loans between banks (loans banks use to manage their liquidity). It is our operational target for the implementation of monetary policy.

The Bank's inflation target is; to keep annual consumer price inflation at between 2 and 3 per cent, on average, over time.

On 7 September 2016 the Australian Reserve Bank cash rate target stood at 1.50% and it remained unchanged for over two year and seven months, until it fell by 25 basis points to 1.25% on 5 June 2019.

The cash rate target continued to fall the next five months until it reached 0.10% on 4 November 2020 and remained unchanged until 4 May 2022 when it rose to 0.35%.

Since then the monthly cash rate target announcements began to tread water on 5 July 2023 at 4.10%.

Sadly, on 8 November 2023 the cash rate target again rose by 25 basis points to 4.35% - the 13th rate hike since May 2022.

The Reserve Bank's next monthly target announcement is due on Tuesday, 5 December 2023.

As for the Reserve Bank's inflation target of keeping consumer price inflation at between 2 and 3 per cent, this target range had been met consistently for the ten and a half years up to December Quarter 2021 and ever since been consistently exceeded. Peaking at 7.8% in December Quarter 2022 before gradually falling to 5.4% in September Quarter 2023 with a monthly indicator of 5.6%.

I suggest that readers do not anticipate any interest rate relief this coming December. Nor expect any significant fall in the Living Cost Index or Consumer Price Index as the country enters 2024.

If The Guardian article on the latest Essential Research poll is correct, it is likely that the more than half of all Australian voters who reportedly are struggling financially will read the following with a jaundiced eye.......

Reserve Bank of Australia, MediaRelease, 7 November 2023:

Statement by Michele Bullock, Governor: Monetary Policy Decision Number 2023-30

Date 7 November 2023

At its meeting today, the Board decided to raise the cash rate target by 25 basis points to 4.35 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.25 per cent.

Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025. The Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe.

The Board had held interest rates steady since June following an increase of 4 percentage points since May last year. It had judged that higher interest rates were working to establish a more sustainable balance between supply and demand in the economy. Furthermore, it had noted that the impact of the more recent rate rises would continue to flow through the economy. It had therefore decided that it was appropriate to hold rates steady to provide time to assess the impact of the increase in interest rates so far. In particular, the Board had indicated that it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.

Since its August meeting, the Board has received updated information on inflation, the labour market, economic activity and the revised set of forecasts. The weight of this information suggests that the risk of inflation remaining higher for longer has increased. While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Underlying inflation was higher than expected at the time of the August forecasts, including across a broad range of services. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.

At the same time, high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. This is a more moderate increase than previously forecast. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.

Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

There are still significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the slower growth in the economy at a time when the labour market remains tight. The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. And globally, there remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad.

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. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.

Tweet of the Week

 

The Reserve Bank of Australia has made an ad, and it’s surprisingly honest and informative. #Budget2023 #auspol pic.twitter.com/Ar6FQIWLP2

— theJuiceMedia (@thejuicemedia) May 6, 2023

 

RBA Governor Lowe set to meet with Suicide Prevention Australia after indications there is a surge in people reporting elevated distress over cost-of-living pressures

 

The 10th consecutive cash rate rise announced by the Reserve Bank of Australia has low income and middle income Australia reeling.

Post, a daily newsletter from The Saturday Paper, from the pen of the Emails Editor, 8 March 2023, excerpt:

RBA governor Philip Lowe has announced a record 10th consecutive interest rate rise, but signalled the run may be coming to an end amid concerns the hikes are hurting wellbeing.

What we know:

• The RBA increased rates by 25 basis points at the board's March meeting, to 3.6% — the highest interest rate since May 2012 (Nine);

• Mortgage holders with a balance of $750,000 will pay an extra $121 a month — and are now likely paying about $18,900 more in repayments annually since May (realestate.com.au);

• Lowe’s language softened on the prospect of future rate rises however, with economists suggesting there might only be one or two left (AFR $);

• He is set to meet representatives of Suicide Prevention Australia, the peak body that has raised the alarm about a surge in people reporting elevated distress over cost-of-living pressures (The Age);

• Research by Suicide Prevention Australia, given to Lowe late last week, shows 46% of people are reporting high levels of cost-of-living distress;

• There has also been a lift in the number of people reporting serious thoughts of suicide, which reached 16%, with sharp increases in NSW and Victoria;

• Lowe will give further clues as to the RBA’s plans in a speech about inflation and recent economic data to a business conference today (Canberra Times);

• The RBA governor has previously warned of a wage-price spiral driving inflation, though wage growth has been slowing, while corporate profits are surging (The Saturday Paper).

BACKGROUND

Reserve Bank of Australia

Media Release

Statement by Philip Lowe, Governor: Monetary Policy Decision

Number 2023-07

Date 7 March 2023

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.60 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.50 per cent.

Global inflation remains very high. In headline terms it is moderating, although services price inflation remains elevated in many economies. It will be some time before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.

The monthly CPI indicator suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to both global developments and softer demand in Australia. Services price inflation remains high, with strong demand for some services over the summer. Rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country. The central forecast is for inflation to decline this year and next, to be around 3 per cent in mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year. Growth over the next couple of years is expected to be below trend. Household consumption growth has slowed due to the tighter financial conditions and the outlook for housing construction has softened. In contrast, the outlook for business investment remains positive, with many businesses operating at a very high level of capacity utilisation.

The labour market remains very tight, although conditions have eased a little. The unemployment rate remains at close to a 50-year low. Employment fell in January, but this partly reflects changing seasonal patterns in labour hiring. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase.

Wages growth is continuing to pick up in response to the tight labour market and higher inflation. At the aggregate level, wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another. The Board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.

The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.

The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And 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. The Board is seeking to return inflation to the 2–3 per cent target range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.

The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing when and 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 Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

Reserve Bank of Australia raises the interest rate yet again - promising more of the same in coming months. Recession worries begin to emerge

 

On the 7 February 2023 the Reserve Bank of Australia (RBA) increased the official cash rate by 0.25%. The current official cash rate as determined the RBA is now 3.35%.

As we reach the ninth official cash rate rise since 4 May 2022, the Reserve Bank Governor’s words set out below are less and less reassuring.

According to the Australian Stock Exchange (ASX) RBA Rate Tracker:

As at 8 February, the ASX 30 Day Interbank Cash Rate Futures March 2023 contract was trading at 96.525, indicating a 65% expectation of an interest rate increase to 3.60% at the next RBA Board meeting.

The next RBA Board meeting and Official Cash Rate announcement will be on the 7th March 2023.

Reserve Bank of Australia

Media Release

Statement by Philip Lowe, Governor: Monetary Policy Decision

Number 2023-04

Date 7 February 2023

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 3.35 per cent. It also increased the interest rate on Exchange Settlement balances by 25 basis points to 3.25 per cent.

Global inflation remains very high. It is, however, moderating in response to lower energy prices, the resolution of supply-chain problems and the tightening of monetary policy. It will be some time, though, before inflation is back to target rates. The outlook for the global economy remains subdued, with below average growth expected this year and next.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected. Global factors explain much of this high inflation, but strong domestic demand is adding to the inflationary pressures in a number of areas of the economy.

Inflation is expected to decline this year due to both global factors and slower growth in domestic demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.

The Australian economy grew strongly over 2022. The central forecast is little changed from three months ago, with GDP growth expected to slow to around 1½ per cent over 2023 and 2024. The recovery in spending on services following the lifting of COVID restrictions has largely run its course and the tighter financial conditions will constrain spending more broadly.

The labour market remains very tight. The unemployment rate has been steady at around 3½ per cent over recent months, the lowest rate since 1974. Job vacancies and job ads are both at very high levels, but have declined a little recently. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase. The central forecast is for the unemployment rate to increase to 3¾ per cent by the end of this year and 4½ per cent by mid-2025.

Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages spiral, the Board will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms in the period ahead.

The Board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments. There is uncertainty around the timing and extent of the expected slowdown in household spending. Some households have substantial savings buffers, but others are experiencing a painful squeeze on their budgets due to higher interest rates and the increase in the cost of living. Household balance sheets are also being affected by the decline in housing prices. Another source of uncertainty is how the global economy responds to the large and rapid increase in interest rates around the world. These uncertainties mean that there are a range of potential scenarios for the Australian economy.

The Board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. The Board is seeking to return inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.

The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that 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 Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

[my yellow highlighting]

The Sydney Morning Herald, 9 February 2023: 

There is a better than 50-50 chance Australia could fall into recession due to the Reserve Bank’s aggressive increases in interest rates, economists believe, as a growing group of Labor MPs suggest the seven-year term of RBA governor Philip Lowe should not be extended. 

Macroeconomics Advisory chief economist Stephen Anthony said the chance of a recession next year could be as high as 70 per cent due to the impact of the RBA’s high interest rates, coupled with a slowdown in key markets such as China.

Pressure on Lowe has intensified after the RBA pushed interest rates to a 10-year high this week and signalling more than one further increase in coming months. Lowe, whose seven-year term ends on September 17, had signalled in late 2021 that rates would remain on hold until 2024. 

The previous two governors, Glenn Stevens and Ian Macfarlane, both had their terms extended by three years. But with a sweeping review of the central bank due to be finalised and handed to Treasurer Jim Chalmers in late March, there is a growing expectation that Lowe will not stay on beyond September. 

Within the government, there are now open questions about Lowe’s long-term tenure at the bank.....