SYDNEY — The Reserve Bank of Australia raised official interest rates a tenth consecutive time Tuesday, saying inflation remains too high, but its guidance to money markets appeared less hawkish, with the central bank saying inflation may have peaked and wages growth is contained.
The increase takes the official cash rate to 3.60%, its highest level in over a decade, from 3.35% in February, and up from 0.10% in May last year.
“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” RBA Governor Philip Lowe said in a statement.
“The monthly CPI [consumer price index] indicator suggests that inflation has peaked in Australia,” Lowe added.
Overall, the policy guidance this month is more benign than in February, when the RBA warned that “further increases” would likely be needed over coming months.
Lowe also highlighted slowing gross domestic product growth and that wages growth remains largely subdued.
The dovish shift in tone from the RBA follows a recent glut of data showing that higher interest rates are starting to cool the economy. GDP growth in the fourth quarter was weaker than expected, while wage increases remain contained, snuffing out talk of a looming wage-price spiral.
“Wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another,” Lowe said.
“The board, however, remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment,” he added.
Unemployment has nudged higher after two months of falling employment, but the jobless rate remains close to its lowest level in 50 years, keeping labor market conditions tight.
Inflation in Australia may not reach levels seen in other major economies given soaring household debt levels could subdue consumer spending as interest rates rise, while long-term wage agreements, which affect close to 60% of all workers, are slowing the rate at which wages are rising.
The RBA appears somewhat less hawkish as close to one million mortgages nationally are transitioning from ultra-low fixed interest rates to sharply higher floating rates. The transition is expected to see consumers slow spending considerably.
Still, global factors will weigh heavily on the RBA’s decision making over coming months, especially as the Fed Reserve has indicated it has more work to do to tame inflation.
“Global inflation remains very high…It will be some time before inflation is back to target rates,” Lowe said.
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