The latest data has generally surprised on the upside, with businesses still reporting buoyant trading conditions and ongoing constraints with worker shortages (a sign that demand is still outstripping supply) and consumers maintaining a brisk pace of spending despite mounting headwinds from cost of living pressures and rising interest rates. This suggests that the positive supports of an elevated savings rate, excess savings and increases in employment have so far more than offset the drags from inflation and monetary tightening.

Growth momentum will inevitably slow, and there are now some signs of this in the labour market data (where growth in employment has moderated) and in the construction sector and property market. But the ongoing strength in demand means it continues to outstrip the economy’s supply side capacity. This is feeding local inflationary pressures, and there is a need for further increases in the cash rate to counteract this trend; monetary tightening will ultimately dampen the pace of demand growth, to realign aggregate demand with supply and cool inflation.

The resilience of the economy has prompted a rapid pace of rate rises from the RBA Board to date, a slowdown in the pace of rate rises is now appropriate, to give the Board time to assess the impact of the tightening to date and decide on future increases. Over the next six months it will likely be appropriate for the cash rate to move beyond its neutral level, to decisively dampen demand and ensure that inflation expectations remain well-anchored.