Source link – Reserve Bank of Australia

At its meeting today, the Board decided to increase the cash rate target by 25 basis points to
4.10 per cent. It also increased the interest rate paid on Exchange Settlement balances by
25 basis points to 4.00 per cent.

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. This further increase in interest rates is to
provide greater confidence that inflation will return to target within a reasonable timeframe.

High inflation makes life difficult for people and damages the functioning of the economy. It erodes the
value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens
income inequality. 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. Recent data indicate that the upside risks to the inflation outlook have increased and the
Board has responded to this. While goods price inflation is slowing, services price inflation is still
very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with
productivity growth remaining subdued.

Growth in the Australian economy has slowed and conditions in the labour market have eased, although they
remain very tight. The unemployment rate increased slightly to 3.7 per cent in April and
employment growth has moderated. Firms report that labour shortages have eased, although job vacancies
and advertisements are still at very high levels.

Wages growth has picked up in response to the tight labour market and high inflation. Growth in public
sector wages is expected to pick up further and the annual increase in award wages was higher than it was
last year. At the aggregate level, wages growth is still consistent with the inflation target, provided
that productivity growth picks up.

The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger
increases in both prices and wages, especially given the limited spare capacity in the economy and the
still very low rate of unemployment. Accordingly, it will continue to pay close attention to both the
evolution of labour costs and the price-setting behaviour of firms.

The Board is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft
landing remains a narrow one. A significant source of uncertainty continues to be the outlook for
household consumption. The combination of higher interest rates and cost-of-living pressures is leading
to a substantial slowing in household spending. Housing prices are rising again and some households have
substantial savings buffers, although others are experiencing a painful squeeze on their finances. There
are also uncertainties regarding the global economy, which is expected to grow at a below-average rate
over the next couple of years.

Some further tightening of monetary policy may be required to ensure that inflation returns to target in a
reasonable timeframe, but that will depend upon how the economy and inflation evolve. The Board will
continue to pay 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.

Source link – Reserve Bank of Australia