Australia: RBA raises rate in February; hints at further hikes ahead
At its monetary policy meeting on 7 February, the Reserve Bank of Australia (RBA) hiked the official cash rate (OCR) from 3.10% to 3.35%. The decision matched market expectations and took the cumulative increase in the OCR since May 2022 to 325 basis points.
The Bank hiked rates again in a bid to curb inflation and prevent inflation expectations from becoming entrenched. Both external and domestic factors have fueled price pressures so far, with inflation accelerating to 7.8% in Q4 from Q3’s 7.3%. Global economic conditions, accelerating wage growth and a tight labor market continued to exert upward pressure on prices. The Bank expects inflation to decline in 2023, thanks to easing global supply-side bottlenecks, stabilizing commodity prices and cooling domestic demand—partially due to higher interest rates. The RBA sees inflation averaging 4.8% in 2023 and falling to around 3.0% by mid-2025. Meanwhile, the Bank projects the economy to expand by around 1.5% in both 2023 and 2024.
The Bank maintained a hawkish tone in its communiqué, stating that it “expects that further increases in interest rates will be needed over the months ahead”. Moreover, it specified that the RBA “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 global economy and the labor market.
Commenting on the outlook, Lee Sue Ann, economist at UOB, said:
“We are penciling in another two more 25 basis points hike, which will take the OCR to 3.85%, before looking for a pause. That said, the releases of Q4 2022 wage price index later this month on 22 February and Q4 2022 GDP on 1 March will be closely watched.”
Meanwhile, Robert Carnell, economist at ING, commented:
“For Australian markets, the near term is likely to see some more support for the AUD from higher rate expectations, though it would only take a soft inflation report or some weak employment data for holes to start appearing in the RBA’s assertions.”
The next monetary policy meeting is scheduled for 7 March.