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Australia Monetary Policy March 2023

Australia: RBA raises rate again in March; hints at further hikes ahead

At its monetary policy meeting on 7 March, the Reserve Bank of Australia (RBA) hiked the official cash rate (OCR) from 3.35% to 3.60%. The decision marked the 10th consecutive rate hike, matching market expectations and taking the cumulative increase in the OCR since May 2022 to 350 basis points.

The Bank hiked rates again in a bid to curb inflation and prevent inflation expectations from becoming entrenched. Although available data suggests inflation may have peaked, it remains well above the Bank’s 3.0% target, as accelerating wage growth amid a tight labor market continues to exert upward pressure on prices. The Bank expects inflation to decline in 2023 and 2024, thanks to easing global supply-side bottlenecks and cooling domestic demand—with the latter partially due to the lagged effect of higher interest rates. 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 will be needed to ensure that inflation returns to target”. 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 future monetary policy decisions would be guided by data and the evolving outlook for inflation, domestic demand, the labor market and the global economy.

Commenting on the outlook, Lee Sue Ann, economist at UOB, said:

“We are keeping our view of one more 25bps hike in Apr, which will take the OCR to 3.85%. Any changes to our forecasts will depend on incoming economic data. But we strongly believe that the RBA needs to remain a cautious approach, as heavily indebted households are running down their savings in response to price increases and higher loan repayments.”

The next monetary policy meeting is scheduled for 4 April.

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