Reserve Bank of Australia governor Philip Lowe warns there may be more tightening of monetary policy required, but also says another rate rise is far from a forgone conclusion. Photo: AFP / David Gray
Just a month after the Reserve Bank of Australia (RBA) kept rates on hold - to assess the economic fallout from an unprecedented string of 10 consecutive rate hikes - on Tuesday afternoon it shocked most experts with another rise.
The decision was taken at an RBA board meeting in Perth - the first time since before the pandemic that the bank had made it to the West - and governor Philip Lowe spoke at a dinner filled with business leaders to explain why the pause was so short.
"We have seen further evidence that the Australian labour market is still very tight, that services price inflation is proving to be uncomfortably persistent abroad, and that asset prices - including the exchange rate and housing prices - are responding to changes in the interest rate outlook," he told the gathered crowd.
Lowe was referring to March unemployment data, released in April, showing the jobless rate remained at near-a-50-year low of 3.5 per cent after more than 50,000 extra jobs were added to the economy.
The Australian dollar had been edging lower - sitting just above 66 US cents before the rates decision was announced - jumping to 67 US cents soon after. A lower dollar lifts import prices and, thus, inflation.
House price data released on Monday showed a second consecutive month of national gains, with the five biggest capitals all posting price rises in April, and the average of regional markets up too, albeit barely.
However, the coup de grace was last week's inflation number for the March quarter.
Initially interpreted by a majority of economists as supporting at least another month or two on hold, the RBA was spooked by an acceleration in price rises for services, such as hospitality, healthcare and education.
"Goods price inflation is slowing, which is good news," Lowe said, "but services and energy price inflation is still high and likely to remain so for some time.
"Looking overseas, we see worryingly persistent services price inflation.
"It is possible that circumstances might be different here in Australia, but the experience abroad points to an upside risk, especially given the high degree of commonality across countries in inflation dynamics recently."
RBA 'not on a pre-set course'
It is a risk the RBA evidently did not want to take, deciding that another rate rise now may head off the need for even higher rates later.
"We are taking a bit more time than some other countries, on the basis that doing so can preserve some of the gains in the labour market," Lowe said.
"But there is a limit here. If we take too long to get inflation back to target, expectations will adjust and life will become more difficult."
However, while warning that "some further tightening of monetary policy may be required", Lowe was also at pains to emphasise that another rate rise is far from a forgone conclusion.
"The board is not on a pre-set course," he said.
"It will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.
"Once again, we will do what is necessary to bring inflation back to target."
He also hit back at public criticism of the RBA after a review, released late last month, pointing out that much of its contents was supportive of the bank's work and achievements to date.
"We have a strong focus on doing what is right for the country, as a whole, over the medium term, even if it is difficult for some people in the short term," he argued.
"[Tuesday's] decision by the board is an example of that."
- ABC