RBA Cash Rate Increase by 0.25% to 3.60% – ARE WE THERE YET?

The Reserve Bank of Australia yesterday announced a widely predicted 0.25% increase in the target cash rate to 3.60%. This was the 10^th consecutive increase since May last year and has many in Australia asking, ‘ARE WE THERE YET?’. To answer this, the RBA will rely on upcoming economic data both here and overseas. This data includes the Australian February labour force and retail trade surveys, due on 16 and 28 March respectively.

Even though the RBA commented that inflation has peaked in Australia and that there is a lower risk of a cycle where prices and wages chase each other (a major risk with high inflation), they still expect “further increases in interest rates will be needed over the months ahead”. The RBA statement yesterday on Monetary Policy did seem to indicate that the RBA believes the 10 increases in the Cash Rate so far is working to combat inflation, noting that “Growth in the Australian economy has slowed, with GDP increasing by 0.5 per cent in the December quarter and 2.7 per cent over the year” and “Household consumption growth has slowed due to the tighter financial conditions”.

The Australian economic data probably indicates a pause in interest Rates in April and closer to answering yes to the question of whether ‘we are there yet?’ At BKM Wealth, our concern lies with the overseas Economic, Inflation and Interest Rate settings. Last night, the message from the Federal Reserve Chair Jay Powell was that in the United States economic conditions remain strong and that they have a long way to go to reduce Inflation down to their target of 2.0%. Of most concern to commentators was his comment that the path to lower inflation is “likely to be bumpy”.

Murray Nicol, Financial Advisor at BKM Wealth said he ‘expects that the RBA will pause on an increase to the Cash Rate next month but will still increase the cash rate a further 2 times between now and August. This will take the target cash rate to 4.1%.

If Economic Growth and Inflation overseas is higher than expected and Interest Rate increases from overseas Central Banks is higher and faster than previous increases; then the RBA will have no choice but to increase rates next month and also in May to get to the expected Cash Rate of 4.1% faster.

“We aren’t there yet with higher interest rates”.