RBA defies expectations with rate hike, may still require further tightening

In a surprising move, RBA raises cash rate target by 25bps to 3.85%, contrary to market expectations of a hold. Nevertheless, RBA softened its tightening bias, stating, “some further tightening of monetary policy may be required,” depending on “how the economy and inflation evolve.”

Despite acknowledging that Australian inflation “has passed its peak” and “recent data showed a welcome decline,” the central bank still expects inflation to be at 4.25%, slowing to 3% in mid-2025. That is, “it takes a couple of years before inflation returns to the top of the target range”. RBA added that services price inflation remains “still very high and broadly based” with upside risks, while goods inflation is decelerating.

RBA projects the economy to grow by 1.25% in 2023 and around 2% over the year to mid-2025. With anticipated below-trend economic growth, unemployment rate is forecast to gradually increase to around 4.5% in mid-2025.

Full RBA statement here.