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.
