The Reserve Bank has shifted gears again and hiked by 25 basis points in May following a pause in the month prior.

The return to hiking follows still-high inflation data that, while easing, was not enough to convince the board to keep the cash rate on hold for the second month in a row.

The increase brings the cash rate to 3.85 per cent, its highest level since April 2012.

“Inflation in Australia has passed its peak, but at seven per cent is still too high and it will be some time yet before it is back in the target range,” RBA Governor Philip Lowe said.

“Given the importance of returning inflation to target within a reasonable timeframe, the board judged that a further increase in interest rates was warranted today.”

Further tightening has not been ruled out.

“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,” the governor said.

The Reserve Bank board opted to leave the cash rate unchanged in April in recognition that the full weight of interest rates were yet to be felt and they needed more time to see how higher rates were playing out.

The board has since ingested the quarterly consumer price index, which fell from 7.8 per cent annual growth in the December quarter to seven per cent in the March quarter.

Despite coming off its peak, inflation remains more than double the top of the RBA’s target of two-three per cent, and rent, energy and other inflation sources are showing few signs of easing.

Plus, the labour market is still tight, home prices are picking up and the business sector remains resilient.

Poppy Johnston
(Australian Associated Press)