WEEKLY E-MAIL

13 February 2023

CASH RATE TARGET LIFTS TO 3.35%

By James Malliaros

Last Tuesday, the Reserve Bank of Australia delivered the expected 0.25% interest rate increase for February, which took the cash rate to 3.35%. This was ninth monthly increase in a row, with the cumulative increases since May 2022 now at 3.25%.

However, there were considerable changes to the RBA’s rhetoric in this post meeting statement, which on balance was not good news for mortgage holders:

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.

Clearly the RBA’s statement spells out that further rate hikes are coming, with many economists expecting the cash rate will rise another 0.25% in March and then to 3.85% by May 2023.

Source: PIMCO, Bloomberg

The reason for the ongoing rise in interest rates is that the RBA’s updated inflation forecasts have headline inflation at or above the top of its target band (2% – 3%) out to the middle of 2025.The ongoing strength in inflation and the prospect of such an extended period of inflation well above the target continues to raise the risk that medium-term inflation expectations become anchored. The RBA is conscious of this and noted in its statement.

If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.

The economic landscape has been a difficult one for the RBA to navigate over the last 12 months. Domestic activity and growth data have generally softened, as has the housing market, with house prices declining approximately 1% per month and 9% year on year nationwide to January (-14% in Sydney the worst in the country). In addition, retail sales contracted in the final quarter of 2022 and consumer confidence remains depressed.

However, the labour market remains very resilient, with the unemployment rate finishing 2022 at 3.5%, and wage figures remaining firm. This has led to inflation remaining stronger than RBA forecasts with headline inflation finishing 2022 at 7.8%, a very high figure historically.

Looking ahead, the RBA is closely monitoring upcoming household spending and wages inflation data. Depending on the figures, it is expected to raise rates again in March and to eventually move to an extended pause, assuming consumer spending continues to slow as the effects of higher interest rates start to impact households, and some easing in the labour market becomes apparent.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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