Inflation slows but further interest rate rises are still on the cards

The rate at which inflation is growing has eased over the past three months, according to the latest economic data. 

The Australian Bureau of Statistics (ABS) quarterly Consumer Price Index (CPI) indicator reported a 1.4% rise over the three months to March 2023. In comparison, CPI rose 1.9% in December 2022 compared to the previous quarter.

Annual inflation increased 7.0% in the twelve months to March. This represents a 0.8% quarter-on-quarter decrease from December's 7.8% rise in annual inflation, advancing the notion that the pace of inflation is slowing.

"CPI inflation slowed in the March quarter, with the quarterly rise being the lowest since December 2021. While prices continued to rise for most goods and services, many of these increases were smaller than they have been in recent quarters," according to ABS head of price statistics Michelle Marqardt.

The biggest contributors to price rises in the March quarter were medical and hospital services (+4.2%), tertiary education (+9.7%), gas and other household fuels (+14.3%) and domestic holiday travel and accommodation (+4.7%).

What does this mean for interest rates?

These figures may provide justification for the Reserve Bank of Australia’s (RBA) decision to pause its rate tightening cycle in April but as long as inflation remains above the 2-3% band, it’s possible that Australia's central bank could impose more rate hikes over the coming months in an effort to bring it back down.

In his latest statement on monetary policy, RBA governor Philip Lowe reaffirmed that, while the statistics show inflation had peaked in December, it was still too high and the RBA's priority remains focused on tempering inflation.

“The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target… and will do what is necessary to achieve that,” Lowe said.

The RBA’s April rates' pause was the first time in 12 months that the central bank had not imposed an increase. Since May 2022, the cash rate has risen 350 basis points to 3.60%.

Three of the four big banks have forecast that the RBA will deliver one more cash rate hike this year, in May. However, ANZ is more flexible, suggesting that the final hike may be imposed sometime between now and August 2023.

New monthly inflation indicator proves useful

While the quarterly CPI indicator is the key measure of inflation in Australia, the monthly indicator from the ABS - which began reporting in September 2022 - has provided additional context and information helpful to organisations, including the RBA, when making important economic determinations.

The monthly indicators have shown a steady decrease in the growth rate of inflation since January 2023. These consecutive months of lower annual inflation is also known as disinflation.

Disinflation typically describes a slowing in the rate of inflation over the short-term. Proponents argue that a healthy amount of disinflation over time is necessary to prevent the economy from overheating.

RBA Board shake-up announced

The Reserve Bank of Australia (RBA) Board is expected to relinquish its mandate to set the official cash rate and hand over duties to a separate panel of experts and specialists, according to advice outlined in an independent review.

Treasury released the RBA Review entitled ‘An RBA fit for the Future’. The almost 300-word report offers 51 recommendations, including the establishment of a new Monetary Policy Board to oversee changes to the national cash rate and a separate Governance Board, responsible for the day-to-day operations of the bank.

While a different panel of fiscal experts - purportedly better equipped with specialist skills to make monetary policy decisions - could be given the power to set the cash rate and influence bank interest rates, it appears unlikely that this would have any radical effects, at least not in the short term.

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