The cash rate has risen once again by 0.25% bringing the current cash rate to 3.35%. This decision was expected by most economists.
It is believed that the wording used by the RBA has become more aggressive towards stamping out inflation with continued interest rate rises.
State of the Economy and Interest Rate Forecasts
Despite a slowing in global inflation, the RBA has maintained their inflation forecasts originally outlined in the November meeting. Current inflation targets are 4.75% over 2023 and 3% by mid 2025.
Growth and unemployment forecasts also remain unchanged since the November meeting. Current growth forecasts indicate 1.5% growth in 2023 and 2024. While unemployment is forecast to rise to 3.75% by the end of 2023 and 4.5% by mid 2025.
The Reserve Bank Governor recently stated that “The recovery in spending on services following the lifting of COVID restrictions has largely run its course”. This statement indicates that the RBA expects the rapid increase in spending on services to level off in the near future.
The RBA is still trying to assess the effects of recent rate hikes on household spending. With interest payments doubling since May last year, this will inevitably cause a strain on many household budgets, particularly as fixed rate terms come to an end.
With underlying inflation running around 6.9%, the worry for the RBA is that high inflation will become entrenched in people’s minds. This will cause people to be more likely to spend now while prices are cheaper, and further drive-up prices.
Source: Westpac
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