The Reserve Bank of Australia’ has decided to increase the cash rate by 25 basis points to 4.10 per cent.

At the Reserve Bank of Australia’s meeting today, the decision was made to increase the cash rate by 25 basis points to 4.10 per cent. It also increased the interest rate paid on Exchange Settlement balances by 25 basis points to 4.00 per cent.

The Board says that inflation has ‘passed its peak’ but it is still quite high and will take a while before it is back within a target range. The further rise to the interest rates is said to provide ‘greater confidence’ that inflation will be back within a target range in the not-too-distant future.

The RBA acknowledge that high inflation makes life difficult for people and damages the functioning of the economy. It has numerous impacts on things such as family budgets, value of savings, and makes it harder for businesses to invest and plan. However if high inflation were to become ingrained in people’s expectations, it would be costly to reduce later, involving even larger rate increases and a rise unemployment.

While goods price inflation is slowing, services price inflation is still very high and is proving to be very persistent overseas. Unit labour costs are also rising briskly, with productivity growth remaining subdued.

Growth in the Australian economy has slowed and conditions in the labour market have eased, although they still remain quite tight. The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated. Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.

Wages growth has picked up in response to the tight labour market and high inflation. Growth in public sector wages is expected to pick up further and the annual increase in award wages was higher than it was last year. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up.

The Board remains alert to the risk that expectations of ongoing high inflation contribute to larger increases in both prices and wages, especially given the limited spare capacity in the economy and the still very low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.

The RBA is still seeking to keep the economy on an even keel as inflation returns to the 2–3 per cent target range, but the path to achieving a soft landing remains a narrow one.

A significant source of uncertainty continues to be the outlook for household consumption. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. Housing prices are rising again and some households have substantial savings buffers, although others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.