The Reserve Bank wasted no time this week taking its sledgehammer to the currently rampaging rate of inflation in Australia, using its first meeting for 2023 to increase the cash rate by a further 25 basis points.
This takes the official rate to 3.35%, its highest point since December 2012.
In a statement announcing the decision, RBA Governor Philip Lowe said that CPI inflation over the year to the December quarter was 7.8%, the highest since 1990.
“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”, he added.
Lowe went on to say that 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.”
Lowe also indicated this week that there is likely to be more pain yet to come for borrowers.
“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”, he said, adding that 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’.
