MNI RBA WATCH: 8-1 To Hike; Inflation-Growth Equation Worsens

The Reserve Bank of Australia Board voted eight-one to raise the cash rate by 25 basis points on Tuesday, presenting a more unified front as it confronts persistent inflation alongside the impact on output of the Middle East-driven oil shock, Governor Michele Bullock told reporters.

Bullock said the accompanying Statement on Monetary Policy highlighted a sharper trade-off between inflation, unemployment and growth than noted in February.

“This oil shock, driven by events in the Middle East, has complicated things immensely. It makes the trade-off much worse — for any given inflation rate, you get lower growth and higher unemployment,” she said following the widely expected hike. (See MNI RBA WATCH: Board To Hike On Inflation Concerns)

“It’s quite possible we wouldn’t have needed to increase rates a third time if the shock hadn’t occurred. But it did occur at a time when inflation was already too high.”

Tuesday’s move takes the cash rate to its highest level since November 2023 and marks the third increase this year, reversing earlier easing.

Bullock said the lone dissenter – March's decision was carried five-to-four – placed greater weight on downside risks to demand. (See MNI RBA WATCH: Timing Drove Split Vote, Not Direction-Bullock) “They were less convinced about the extent of excess demand and more concerned about the impact the oil shock could have on activity,” she said, adding all members considered both inflation and growth risks.

The Australian dollar weakened slightly following her comments, which emphasised two-way risks to the outlook, while futures were pricing in a 4.68% rate by the end of the year, down from 4.86% last week.

FORECASTS

The Statement on Monetary Policy showed the cash rate is assumed to reach 4.7% by the December quarter, 50bp higher than in February, while trimmed-mean inflation is projected at 3.5% y/y, up 30bp.

Unemployment is expected to hold around 4.3% through this year before rising to 4.6% by end-2027, while GDP growth and labour productivity are forecast to weaken.

Bullock reiterated the Bank’s focus on inflation as a precondition for sustainable employment. “We can’t control the full employment rate directly. What we can do is keep inflation low and stable — that creates the conditions for businesses to invest and hire. You can’t have full employment without low and stable inflation in the long run.”

She said the Bank is seeking a moderation in demand to better align with supply constraints. “We’ve got a supply problem and very weak productivity growth. Until that improves, stronger growth will run up against capacity constraints, and that also limits real wage growth.”

OIL CONCERNS

Bullock warned the oil crisis delivers a negative income shock for households and could complicate wage dynamics.

“I fully expect workers will try to recover the real income they’ve lost by seeking higher wages. How much they achieve will depend on labour market conditions,” she said. “What worries me is this is the second shock of this nature in a few years. With a still-tight labour market, it’s possible stronger wage outcomes become more persistent and feed into inflation expectations.”

Responding to a question on potential fuel shortages, Bullock said near-term inflation from higher energy costs is unavoidable. “These rate increases won’t affect inflation over the next six months — that’s already locked in. What we’re trying to guard against is those price increases becoming embedded in expectations.”

It is reasonable for firms to pass on higher costs, she argued, but warned against a shift in pricing behaviour. “What we want to avoid is people thinking it’s normal for prices to keep rising at 4% or 5%. That’s the challenge.”