Statement by Philip Lowe, Governor: Monetary Policy Decision | Press Releases
At its meeting today, the Board of Directors decided to increase the target cash rate by 25 basis points to 2.85%. It also increased the interest rate on foreign exchange settlement balances by 25 basis points to 2.75%.
As is the case in most countries, inflation in Australia is too high. In the year to September, the CPI inflation rate was 7.3%, its highest level in more than three decades. Global factors largely explain this high inflation, but the strength of domestic demand relative to the economy’s ability to meet that demand also plays a role. Bringing inflation back to its target requires a more sustainable balance between demand and supply.
A further rise in inflation is expected over the coming months, with inflation now expected to peak at around 8% later this year. Inflation is then expected to decline next year due to the ongoing resolution of global supply issues, recent declines in some commodity prices and slower demand growth. Medium-term inflation expectations remain well anchored, and it is important that this remains the case. According to the Bank’s central forecast, CPI inflation will be around 4¾% in 2023 and slightly above 3% in 2024.
Australia’s economy continues to grow strongly and national income is boosted by record high terms of trade. Economic growth is expected to slow in the coming year as the global economy slows, the rebound in services spending takes its course and household consumption growth slows due to tighter financial conditions. The Bank’s central GDP growth forecast has been revised down slightly, with growth of around 3% expected this year and 1½% in 2023 and 2024.
The labor market remains very tight, with many companies finding it difficult to hire. The unemployment rate was stable at 3.5% in September, around the lowest rate in nearly 50 years. Vacancies and job vacancies are both at very high levels, although employment growth has slowed in recent months as slack in the labor market has been absorbed. According to the central forecast, the unemployment rate is expected to remain around its current level for the next few months, but gradually increase to just over 4% in 2024 as economic growth slows.
Wage growth continues to pick up from the low rates of recent years, although it remains weaker than in many other advanced economies. A further recovery is expected due to a tight labor market and higher inflation. Given the importance of avoiding a price-wage spiral, the Council will continue to pay particular attention to both the evolution of wage costs and the price-setting behavior of companies over the period to come.
Price stability is a prerequisite for a strong economy and a prolonged period of full employment. In view of this, the Council’s priority is to bring inflation down to 2–3 percentage over time. It seeks to do so while keeping the economy in balance. The path to achieve this balance remains narrow and it is clouded by uncertainty.
One source of uncertainty is the outlook for the global economy, which has deteriorated in recent months. Another is how household spending in Australia is responding to tighter financial conditions. The Council recognizes that monetary policy operates with a lag and that the full effect of rising interest rates is yet to be felt on mortgage payments. Rising interest rates and rising inflation are putting pressure on the budgets of many households. Consumer confidence also slumped and house prices fell after previous strong increases. By working the other way, people find jobs, earn more hours of work, and receive higher wages. Many households have also built up significant financial reserves and the savings rate remains higher than it was before the pandemic.
The Commission has significantly raised interest rates since May. This was necessary to establish a more sustainable balance of supply and demand in the Australian economy to help bring inflation back to target. The Commission plans to raise interest rates further in the coming period. It closely monitors the global economy, household spending, and wage and price setting behavior. The magnitude and timing of future interest rate increases will continue to be determined by incoming data and the Board’s assessment of the outlook for inflation and the labor market. The Board remains resolute in its determination to bring inflation back to target and will do what is necessary to achieve this.