The Reserve Bank of Australia (RBA) Board has lifted the cash rate target by another 25 basis points to 4.10 per cent as retailers raise concerns over business costs.
This is the 12th rate hike since May 2022.
In a statement, RBA governor Philip Lowe said inflation in Australia has passed its peak, “but 7 per cent is still too high and it will be some time yet before it is back in the target range.”
“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe.
“High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.”
In response, National Retail Association CEO Greg Griffith said the country’s business owners need a break to assess the latest economic impacts before another interest rate rise – noting that wages will increase by 5.75% on July 1.
“The implications of a twelfth interest rate rise and a significant award wage increase will hit retailers hard,” Griffith said. “In just a few months the sector has been hit with a wage and superannuation guarantee increase, staffing and resourcing issues, high inflation and cost of living causing flatlining consumer confidence and spending.
“The cost of doing business is already unfeasible, and the decision to increase rates for the twelfth consecutive time could force many retailers to shut down.”
Griffith said the imminent fall in consumer spending from this decision, coupled with the increase in wages, means any hope of survival for some retailers will depend on shedding labour costs.
“This is a challenge for businesses of all sizes, but particularly our small and medium enterprises,” he said. “It will really put their viability to the test when we see pay packets rise faster than sales.
“Paying more on interest rates and more on wages means some businesses will have to figure out if they can keep going, all the while not knowing which blow they will cop next.
“What both retailers and consumers need right now is stability.”
Lowe said growth in the Australian economy has slowed and conditions in the labour market have eased, “although they remain very tight.”
“The unemployment rate increased slightly to 3.7 per cent in April and employment growth has moderated,” Lowe said. “Firms report that labour shortages have eased, although job vacancies and advertisements are still at very high levels.”
Lowe added that wages growth has picked up in response to the tight labour market and high inflation. He noted the annual increase in award wages this year was higher than last year.
“At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” he said.
“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 Board is aiming to bring inflation down to the 2-3 per cent target range, but the path to achieving a soft landing remains a narrow one according to Lowe.
“A significant source of uncertainty continues to be the outlook for household consumption,” he continued. “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.”
Lowe said some further tightening of monetary policy “may be required” to ensure that inflation returns to target in a reasonable timeframe.
“But that will depend upon how the economy and inflation evolve,” he said. “The Board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”