At its meeting today, the Board decided to increase the cash rate target by 25 basis points to
3.35 per cent. It also increased the interest rate on Exchange Settlement balances by
25 basis points to 3.25 per cent.

Global inflation remains very high. It is, however, moderating in response to lower energy prices, the
resolution of supply-chain problems and the tightening of monetary policy. It will be some time, though,
before inflation is back to target rates. The outlook for the global economy remains subdued, with below
average growth expected this year and next.

In Australia, CPI inflation over the year to the December quarter was 7.8 per cent, the highest
since 1990. In underlying terms, inflation was 6.9 per cent, which was higher than expected.
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.

Inflation is expected to decline this year due to both global factors and slower growth in domestic
demand. The central forecast is for CPI inflation to decline to 4¾ per cent this year and to
around 3 per cent by mid-2025. Medium-term inflation expectations remain well anchored, and it
is important that this remains the case.

The Australian economy grew strongly over 2022. The central forecast is little changed from three months
ago, with GDP growth expected to slow to around 1½ per cent over 2023 and 2024. The recovery in
spending on services following the lifting of COVID restrictions has largely run its course and the
tighter financial conditions will constrain spending more broadly.

The labour market remains very tight. The unemployment rate has been steady at around
3½ per cent over recent months, the lowest rate since 1974. Job vacancies and job ads are both
at very high levels, but have declined a little recently. Many firms continue to experience difficulty
hiring workers, although some report a recent easing in labour shortages. As economic growth slows,
unemployment is expected to increase. The central forecast is for the unemployment rate to increase to
3¾ per cent by the end of this year and 4½ per cent by mid-2025.

Wages growth is continuing to pick up from the low rates of recent years and a further pick-up is expected
due to the tight labour market and higher inflation. Given the importance of avoiding a prices-wages
spiral, the Board will continue to pay close attention to both the evolution of labour costs and the
price-setting behaviour of firms in the period ahead.

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.

The Board’s priority is 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. The Board is seeking to return
inflation to the 2–3 per cent range while keeping the economy on an even keel, but the path to
achieving a soft landing remains a narrow one.

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. 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. The Board remains resolute in its determination to return inflation to target and will do
what is necessary to achieve that.