RBA Cash Rate Increase Update

Outstanding news for mortgage holders has finally been broken! April delivered much-anticipated relief for Australian real estate investors as the cash rate was officially paused at 3.60%, the highest since 2012. This pause comes at the end of 10 consecutive rate rises administered by the RBA. Such an extended stretch of rises is a record-breaking move by the central bank. The RBA board has been deciding to increase the cash rate target by 25 or 50 basis points at every one of their monthly meetings since May 2022.

Before we continue, it may help to recollect why the RBA decides to increase or decrease the cash rate. The RBA uses the cash rate as a means of attempting to influence inflation. Currently, at 7% (measured annually for the year to March, inflation is well in excess of where the RBA aims for it to be, which is 2 to 3 per cent on average. Through increasing the cash rate, or as it is otherwise known, tightening monetary policy, the RBA hopes to decrease inflation and ultimately have it return to the 2 to 3 per cent range.

The relationship between cash rate and inflation is imperfect. However, it is the most powerful tool the RBA has to influence the economy. Fortunately, we are starting to see some promising data emerge that could be interpreted as the extended sequence of cash rate rises, having their desired impact. The Australian monthly Consumer Price Index (CPI) measures the year-on-year change in the price of goods monthly and is used to gauge inflation.

January and February of 2023 have recorded lower CPI figures than their respective previous months, leading to a mini downward trend emerging (see Table 1 for values published by the Australian Bureau of Statistics. Meaning the index indicates that inflation is slowing.