The RBA did it again, raising interest rates by 25 bps to 4.10 percent on Tuesday: the highest level since April 2012. The world was a little different back in 2012, the RBA had been mostly cutting rates since the GFC and then governor Glen Stevens was worried about the inflation in bananas. Today, Dr Lowe is not monkeying around. He is determined to keep raising interest rates until inflation has been brought down from the trees. Meanwhile Greens Senator from Tasmania, Nick McKim, says the “RBA has gone rouge” and the government should intervene.

What the RBA said

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range. This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.”

“Recent data indicate that the upside risks to the inflation outlook have increased and the Board has responded to this. While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

Statement by Philip Lowe, Governor: Monetary Policy Decision, 6 June 2023.

What to expect next

Inflation has peaked, so what

The monthly inflation indicator increased from 6.3 percent in March to 6.8 percent in April on an annual basis (see chart below). This was the first increase since December, but was mostly driven by a 9.5 percent increase in automotive fuel -  one of those naughty volatile items.

The increase in April was not enough to change the RBA’s conviction that inflation peaked in December. So why is the RBA continuing to increase interest rates? Dr Lowe is still pointing to services inflation, consumer spending, and the tight labour market. Then there is the fact that at 7 percent inflation is still more than double the RBA’s target rate of 2 to 3 percent.



A tight labour market and consumer spending

Despite many consumers feeling the pain of increasing interest payments, they have little to fear over their job situation currently. Unemployment remains around record lows with a 0.1 percent increase in April while hours worked increased by 2.6 percent.

With the tight labour market, it is no surprise that the Wage Price Index increased by 3.7 percent for the March quarter on an annual basis, continuing its upward trend (see chart below).

Consumer spending continues to trend down with a -1.1 percent decrease in the month of April but is still up 6 percent on an annual basis.

The RBA will want to see more steam come out of the labour market, wages, and consumption before it can think about stopping its interest rate increases.

There are some promising early signs on the employment and wage fronts with Payroll jobs and the Total Wages Index coming down off a recent peak (see chart below) but these series are highly volatile and seasonal.



Impact of the rate increase on the Australian Private Debt Market

It is steady as it goes for the Australian Private Debt market. High interest rates means a higher return and still there is little change to the health of businesses. In March, 11 of the 13 industries saw an increase in their monthly turnover. Only construction and retail saw decreases.