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  • Writer's pictureCrest Economics

Tightening of cash rate- May 2023

Off the back of the RBA review, the overnight cash rate has been tightened again to 3.85%. With the urgency of returning inflation to its 2-3% target, Governor Philip Lowe claims that although “inflation in Australia has passed its peak…7% is still too high”. Thus, despite weaker than expected inflation, Australia’s sustained record unemployment figures of 3.5% served as the impetus for the rate hike. With more events still yet to unfold regarding the global economy, household spending, inflation and the labour market, Lowe continues to hint at further rate rises, should there be a need.

The immediate effects of this can be observed in a sudden appreciation of the AUD to more than US67c, whilst stocks fell about 1.2% due to weakened investor confidence over companies’ ability to service higher borrowing costs. Moreover, having just released their quarterly statement on Monetary Policy, the RBA expects that by the end of the year, economic growth will dampen to 1.2%, and unemployment to reach 4%. More importantly though, the RBA expects headline and underlying inflation to decrease to 4.5% and 4% respectively, offering hope that the end of rate rises is near. Stemming from easing wage growth momentum (a modest 4%), although this reduces risks of a ‘wage-price spiral’, it results in households suffering a 2.5% shrinkage in real income in the year to June.

Fueling the controversy however, Victorian Premier, Daniel Andrews blames Lowe for the borrowings made by the Government during Covid. Having received the same forward guidance that rates wouldn’t rise until 2024, VIC borrowed $24.5bn to address Covid, and is forecast to suffer interest payments of $7.5bn in 2025-26. Thus, Andrews reiterates that the government will be making “difficult decisions” in the new budget, involving less spending on infrastructure, public service and community health. Finally despite claims that inflation is stemming from price gouging, the RBA claims “aggregate profits have grown at a similar pace to labour income”, downplaying the idea that corporate profits are propelling inflation higher.

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