THE Reserve Bank retains a tightening bias after raising the cash rate by a further 0.25 percentage points today to 4.1 per cent.
In the days leading up to the meeting, the market was almost 50-50 on whether the RBA would tighten or not.
In its own words, the RBA has a narrow path to a soft landing.
That path is becoming narrower and narrower — and the risks of recession are rising.
As the RBA pointed out, a significant source of uncertainty comes from household consumption, as elevated prices and higher interest costs drain household coffers.
With only a blunt monetary policy tool to reduce demand, the RBA needs to deal with the economy from an aggregate perspective.
There are higher income households with excess savings that can weather the storm more easily. At the other end there are the more vulnerable.
Lower-income households are devoting more and more of their income to meet housing costs – whether higher rents or mortgage repayments – and elevated day-to-day costs.
So why another rate rise?
The RBA does not want to risk expectations that higher prices are becoming embedded.
May’s monthly inflation number had annual inflation at 6.8 per cent.
There were one-offs that pushed this number higher due to subsidies from early 2022 dropping out. But even so, inflation remains too high not to act.
The RBA would sooner a recession than embedded high inflation, as tough as that may sound.
The central bank continues to point out the risks of not doing anything.
“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 rate rise was not due to last week’s decision to raise the award wages by 5.75 per cent and the minimum wage by 8.6 per cent. The RBA sees wages at the aggregate level as consistent with its target.
There is one important caveat here though. This is the case provided productivity growth picks up.
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This is the key issue. Productivity is not picking up, driving up unit labour costs and exerting upward inflationary pressure.
The RBA will now be looking at the global economy, household spending and the outlook for inflation and the labour market.
The global economy is expected to grow at a sub-trend pace.
Inflation has continued to remain elevated and continues to exceed expectations, particularly in Canada and the United Kingdom.
While the Reserve Bank of New Zealand has indicated it expects to leave rates unchanged, the near-term bias from the major European and North American central banks is for higher rates. That is a club the RBA is firmly in.
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
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