2 May 2023
The Reserve Bank of Australia (RBA) Board has increased the cash rate by 0.25% to 3.85% at its May meeting.
May 2023 - Article provided by PSK's Chief Investment Officer Chris Lioutas.
The move was a fairly big surprise for markets given the broad consensus call for another month of pause. Whilst the March quarter inflation print was pleasingly lower, confirming a lower trajectory ahead, the mix of underlying components showing some “stickiness” effectively forced the RBA’s hand to push monetary settings further into contractionary territory to ensure the inflation trajectory continues lower.
There were some key changes to their May statement relative to the prior month.
Key points of focus include:
- A tone of impatience creeping into the statement – ie. inflation still too high; will be some time yet before it is back in target range; importance of returning inflation to target within a “reasonable timeframe”.
- Reiterated their inflation forecasts of 4.5% for 2023 and 3% for mid-2025.
- Happy with goods price inflation falling but unhappy with services price inflation, particularly the combination of rising labour costs without any productivity increases.
- Reiterated their economic growth forecasts of 1.25% for 2023 and around 2% over the year to mid-2025, with unemployment set to increase to 4.5% in mid-2025.
- Confirmed their commitment to return inflation to target but again emphasised “in a reasonable timeframe”.
We still believe the RBA is near the end of this hiking cycle given the lagged effect of the cumulative rate increases since May 2022, but they will need to see continued evidence of headline and particularly underlying inflation falling over the coming quarters, and/or a subsequent pick-up in productivity growth.
Following their announcement, Australian equities moved lower, the AUD/USD rose, and bond prices fell (ie. yields higher).
As always, if you have any questions or your personal circumstances have changed please do not hesitate to contact your financial adviser
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it’s appropriate to you, in light of your objectives, financial situation or needs.
