Australia’s Reserve Bank has left its key interest rate unchanged for the first time in 11 meetings, indicating that it will monitor the impact of a record run of increases before lifting borrowing costs again. More increases are still possible.
The RBA on Tuesday left its cash rate target at 3.60%. Economists had been divided about whether the central bank would pause for the first time since May or hike by another quarter point to 3.85%.
“The board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” said the RBA’s governor, Philip Lowe, in an accompanying statement. “The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.”
The RBA had been relatively late to lifting its official interest rates, making its first move during last May’s federal election. The increases totalling 350 basis points so far have been the most rapid tightening by the central bank in more than three decades.
Lowe indicated that a pause in rate rises was getting closer after the RBA’s March hike. Since then, several high profile bank failures or takeovers in the US and Switzerland had encouraged investors and some economists to forecast no change this month.
Others, though, had pointed to the strength of the labour market – with unemployment hovering near half-century lows at 3.5% and job vacancies double the long-run average – as among the reasons why more tightening of monetary policy was needed.
The finance minister, Katy Gallagher, said the RBA’s decision was “welcome news”.
“[W]e understand for many Australians and businesses, those cost-of-living pressures remain real,” Gallagher told journalists. “I think today’s decision follows early signs that inflation has likely passed its peak and is beginning to moderate, but we know that it will remain higher [than we’d] like for longer than we like and that’s why addressing inflation was a key priority.”
Markets have responded by sending the Australian dollar as much as a quarter of a US cent lower to 67.6 US cents. Investors had been expecting the pause even if commercial economists were split.
Lowe said the board recognised monetary policy operated with a lag and that the full effect of “this substantial increase in interest rates” so far is yet to be felt.
“A range of information, including the monthly consumer price index indicator, suggests that inflation has peaked in Australia,” Lowe said. “Goods price inflation is expected to moderate over the months ahead due to global developments and softer demand in Australia.”
February’s inflation rate was 6.8%, down from December’s peak of 8.4%. The Australian Bureau of Statistics will release March quarter CPI numbers on 26 April, about a week before the next RBA rates meeting on 2 May.
Even with rent rising at the fastest pace “in some years” and the cost of electricity and other utilities “rising quickly”, the RBA’s central forecast is for inflation to decline this year and next, Lowe said.
“Medium-term inflation expectations remain well anchored, and it is important that this remains the case,” he said.
Ahead of the RBA's rates verdict, here's @ANZ_Research and @RoyMorganAus's weekly inflation expectation gauge looks like. A bit of a pick-up lately. pic.twitter.com/3v0p1EzVn7
— @phannam@mastodon.green (@p_hannam) April 4, 2023
Industry groups also welcomed the RBA’s rate reprieve.
“While consumer prices and input costs are still running too high, there are strong signs that the economy is slowing and that inflation has peaked,” said Innes Willox, the chief executive of the national employer association Ai Group.
“With the full impacts of earlier rate rises yet to flow through and more mortgagees coming off fixed home loan rates, it makes sense for the Reserve Bank to at least pause to allow it to evaluate whether further rate rises will be needed to ensure inflation is tamed.”
David Alexander, a policy adviser at the Australian Chamber of Commerce and Industry, said “small business owners today will be breathing a sigh of relief”.
“The 10 consecutive rate increases since May have been difficult for households and small businesses alike,” he said.
Tim Lawless, research director at CoreLogic, said relief that borrowing costs will stabilise, at least for now, may prompt buyers back into the real estate market.
“Despite the highest interest rates since 2012, we have seen a lift in housing values over the past month,” with prices up an average 0.6% last month, he said. “While we aren’t certain if March marks a turning point for housing values, it’s clear that low advertised supply, the tightest rental conditions on record and surging overseas migration are providing some positive momentum to housing markets.”
However, David Bassanese, chief economist at Betashares, said: “It appears premature for mortgage holders to celebrate too loudly – as the strength of today’s announced pause in rates was relatively weak.
“Given the lags with which policy operates, the RBA appear to have merely decided to take a breather to allow a little more time to assess the impact of its work to date.
“It has left its finger firmly on the rates trigger.”
