RBA Cash Rate, Inflation & Underlying Components

Exploring the RBA cash rate, inflation and underlying components in this week's Aura Private Credit Weekly Insights.



Tuesday, May 2nd saw the RBA announce a 25-basis point increase to the Cash Rate, bringing the rate to 3.85%. This caught the market and mortgage borrowers off guard, which had priced in no further increase. However, it remained consistent with commentary released by the RBA Governor, Phillip Lowe, in April.

A further 25 basis point increase to the RBA Cash Rate brings the total Cash Rate to 3.85%, the highest level since April 2012. Lowe made it clear in his statement that from the Reserve Bank’s point of view, the battle against inflation is not over and further rate rises may be required. He restated that the board remains resolute in its determination to return inflation to the 2%-3% target level and will do what is necessary to achieve that. 

A key talking point in the statement was the contrast between the total rate of inflation vs that seen in the underlying components of inflation. The read for total inflation for the 12 months to the end of the March 2023 quarter came in at 7%, down from the 7.8% displayed in the 12 months to the end of the December 2022 quarter. However, when looking a further layer down at the two core components of inflation, goods inflation and services inflation, there is a two-tiered tale.

Goods inflation has displayed downward movements over the last two quarterly reads, peaking at 9.6% in the September 2022 quarter read, then falling modestly to 9.5% in the December 2022 quarter read and finally, more convincingly to 7.6% in the March 2023 quarter read. Let there be no confusion that the prices for goods in the economy are still increasing at a rate meaningfully above the 2%-3% target range, albeit increasing at a decreasing rate.

Services inflation on the other hand saw its last trough at 2.3% in the December 2021 quarter and has increased in every quarterly read since, landing at 6.1% in the most recent March 2023 quarterly read. It is the price of services increasing at an increasing rate that is now the primary concern of the RBA Board and the broader Australian economy.

1 ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve – May 3rd 2023
2 RBA Chart Pack – May 2023
3 CPI Goods & Services 
4 Australian Bureau of Statistics: Consumer Price Index, March 2023

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