RBA lifts cash rate 25 bps to 3.85pc in May

The Reserve Bank of Australia has decided to once again lift the cash rate, this time by 25 basis points (bps) to 3.85 per cent for May.

Many experts predicted the RBA would keep rates unchanged after last month’s pause, which followed 10 consecutive rates hikes between May 2022 and March 2023.

Although inflation appears to have eased, RBA Governor Phillip Lowe previously warned at April’s meeting that the door remained ajar to further rates increases in the future.

“The board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” Mr Lowe said at the time.

But today, those warned rises came sooner than anticipated, with the RBA declaring an 11th increase in the space of a year.

“Inflation in Australia has passed its peak, but at 7 per cent is still too high and it will be some time yet before it is back in the target range,” the RBA said in a statement on Wednesday.

Inflation levels still remain well above the RBA’s target level of 2 to 3 per cent. The central bank predicts that we are some time off reaching the target level, with inflation expected to be 4.5 per cent in 2023 and 3 per cent in mid-2025.

However, Deloitte Head of Access Economics Pradeep Phillip said the cash rate rise for May was “unnecessary”.

“The decision to lift the cash rate by 25 basis points to 3.85 per cent is unnecessary given 10 previous rate hikes are still working their way through the economy,” he said.

City Index Senior Market Analyst Matt Simpson mentioned the RBA’s decision caught many off-guard.

“The market reaction shows how traders have been wrong-footed, with AUD spiking broadly higher with Aussie bond yields and the ASX falling to a three-week low,” he said.

“It’s also worth noting that money markets had priced in a 100 per cent probability of ‘no change’, so to say the RBA has wrong-footed market participants would be quite an understatement.”

The latest RBA meeting is the first since the external review of the central bank was released, potentially stripping it of the power to weigh in on monetary policy in the future.

The review, labelled “An RBA fit for the future”, came up with 51 recommendations, including a new separate board with industry experts placed in charge of monetary policy, holding fewer board meetings with required press conferences.

The review is designed to bring Australia’s central bank in line with others around the world, including the US Federal Reserve.