Contrary to the popular opinion over the last month, the Board had again increased the cash rate to 3.85% and the rate paid on Exchange Settlement balances to 3.75% for the month of May.
The reason for the increase is to return inflation to the target range within a reasonable timeframe. While inflation has passed its peak, it is still high at 7%, and it is expected to take a couple of years before it returns to the top of the target range.
Inflation is forecasted to be 4.5% in 2023 and 3% in mid-2025.
The labour market in Australia remains very tight, with unemployment rate at a near 50-year low. There has been an ease in labour shortages and a decline in job vacancies, although, many firms are still experiencing difficulty hiring workers.
Wages growth has increased in relation to the tight labour market and high inflation. The growth is still consistent with the inflation target given that productivity growth will also increase. The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages and will continue to closely monitor both labour costs and the price-setting behaviour of firms.
A significant source of uncertainty continues to be the outlook for household consumption, as the combination of higher interest rates, cost-of-living pressures, and the earlier decline in housing prices is leading to a substantial slowing in household spending. Additionally, there are also uncertainties in the global economy which is forecasted to grow for the next couple of years at a below-average rate.
The Board’s priority remains to return inflation to target, as high inflation makes life difficult for people and damages the functioning of the economy. It continues to keep the economy on an even keel as inflation returns to the 2–3% target range.
Depending on the economy and inflation, further increases in monetary policy may be required to ensure the return of inflation in the target range.
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