After a pause last month, the Reserve Bank of Australia (RBA) returned to a cash rate rise in May.
The cash rate has risen by 25 basis points, from 3.60 to 3.85 per cent.
RBA Governor Phillip Lowe said in a media release that 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.
“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today,” he said.
“The Board held interest rates steady last month to provide additional time to assess the state of the economy and the outlook.”
The most recent monthly indicator of Consumer Price Index (CPI) inflation in March sat at 6.3 per cent, down from 8.8 per cent in February and 7.4 per cent in January.
Mr Lowe said while the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range (2-3 per cent).
“Inflation is expected to be 4½ per cent in 2023 and 3 per cent in mid-2025. Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions,” he said.
“The Board’s priority remains 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,”
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case. Today’s further adjustment in interest rates will help in this regard.”
A survey of 1010 Australians conducted by Compare the Market in April 2023 revealed almost half of Australians aren’t equipped or ready to go into a recession, with more than a quarter saying they aren’t prepared and are barely getting by, while 14 per cent said they’re not prepared at all and will face financial setbacks if a recession occurs.
Compare the Market’s General Manager of Money, Stephen Zeller, said the Board’s decision to raise the cash rate for the eleventh time in 12 months was a necessary evil.
“Even though we can see these aggressive rate increases have had some effect on inflation, we’re still nowhere near the target range of 2-3 per cent, although it was a necessary evil for the greater good, many borrowers are going to be in a world of pain,” Mr Zeller said.
“A person with a $600,000 mortgage could be paying $1,351 more each month than they were at the start of May 2022, so it really does pay to do your research and be prepared for that fixed rate cliff. There’s a number of cashback offers available right now that are attached to competitive rates, if you’re not on a competitive rate, it’s time to consider switching – you could be saving thousands of dollars over the life of your loan.”
