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Australia Monetary Policy May 2023

Australia: RBA hikes rates in May; signals possible further hikes ahead

At its monetary policy meeting on 2 May, the Reserve Bank of Australia (RBA) hiked the official cash rate (OCR) to 3.85% from 3.60%. The move followed April’s decision to stand pat after 10 consecutive rate hikes—which translates into a cumulative 375 basis point increase in the OCR since May 2022.

The Bank decided to resume tightening as it deemed that inflation remains too high—although it has already peaked—and wanted to anchor inflation expectations. Inflation remains well above the Bank’s 3.0% target, fueled by accelerating wage growth amid a tight labor market. Therefore, elevated inflation could become entrenched in expectations, which would require more aggressive tightening ahead to curb it. The Bank expects inflation to decline in 2023 and 2024 thanks to easing global supply-side bottlenecks and cooling domestic demand. The RBA sees inflation declining to around 3.0% by mid-2025. Meanwhile, the Bank projects growth to stay below trend both this year and next.

The Bank maintained a hawkish tone in its communiqué, stating that “further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”. Moreover, the RBA specified that it “remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”, adding that data and the evolving outlooks for inflation, domestic demand, the labor market and the global economy would guide future monetary policy decisions.

Commenting on the outlook, Robert Carnell, Asia-Pacific regional head of research at ING, said:

“Our base expectation remains that the rate hikes that have already been implemented will be enough to continue to deliver progress on inflation. And if we get more, then it reduces the chances of achieving a soft landing, and we may begin to see that reflected in lower longer tenor bond yields if the RBA follows through on its latest hawkish guidance.”

The next monetary policy meeting is scheduled for 6 June.

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