Australian borrowers have had a reprieve after the Reserve Bank paused its interest rate hikes for only the second time in the past 14 meetings, giving the central bank more time to assess the state of the economy.
The RBA left its official cash rate at 4.1% on Tuesday, which is still the highest level in 11 years. Economists had been divided in their forecasts, with about half predicting the pause and the others expecting another 25 basis point increase.
The RBA governor, Philip Lowe, said the bank needed time to assess the impact of four percentage points of rate hikes before it acted again.
“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” Lowe said in a statement.
“In light of this, and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady this month.”
Expectations that the central bank would hold off another rate hike were fanned by the minutes of the RBA’s June board meeting. They said last month’s decision to hoist the rate or leave it unchanged had been “finely balanced”.
Since then, the Australian Bureau of Statistics had released its monthly consumer price index numbers showing headline inflation had retreated sharply in May to 5.6%, the lowest in just over a year. Underlying inflation, though, only edged lower.
The former RBA board member Warwick McKibbin was among those calling for the central bank to hold off further hiking interest rates. He predicted a global “deflationary shock” was emerging as supply chains recovered from the twin disruptions of the Covid pandemic and Russia’s war on Ukraine.
Excluding April and now July, the RBA has raised the cash rate 12 times since it began tightening monetary policy in May 2022. Tuesday’s pause, though, may only be temporary as most economists and markets expect the central bank will increase the rate at least one more quarter-point to 4.35% in the coming months before it peaks.
Lowe said on Tuesday that the central bank could have more work to do.
“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,” he said. “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
The Australian dollar fell against the US dollar on Tuesday afternoon, dropping from 66.8 US cents to below 66.5 US cents in the wake of the decision before rebounding. Shares rose by 0.5% as investors bet borrowing costs wouldn’t rise as much as previously calculated.
Whether the RBA will resume hiking in August or extend the pause will hinge on the strength of the economic data. Among the key numbers to watch before the 1 August RBA board meeting will be June employment numbers on 20 July and June quarter consumer price index figures on 26 July.
Lowe said the central bank would also be watching global economic developments and trends in household spending.
Importantly, he downplayed the threat of wage increases fuelling inflation so far.
“At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” he said, adding the RBA board would “continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms”.
The economy may yet avoid a recession. Lowe said the board was “still expecting the economy to grow as inflation returns to the 2 to 3% target range, but the path to achieving this balance is a narrow one”.
Among the forces that may push the economy off that path was how consumer spending responded to the twin forces of higher interest rates and cost-of-living pressures. Household consumption was “a significant source of uncertainty”.
Stephen Smith, a Deloitte Access Economics partner, noted the RBA had dropped its reference to the economy remaining on an “even keel”.
“Growth is already slowing sharply, led in particular by the two most interest rate-sensitive components of economic activity – consumer spending and housing investment,” Smith said.
“Monetary policy is a spent weapon. We must turn towards fiscal policy, investment and innovation to lift productivity; competition policy to improve efficiency and erode market power; and tax policy to boost prosperity.”
The CBA expects the RBA will hike rates to 4.35% in its 1 August meeting to reach a peak. Rival ANZ, which had forecast a rate rise on Tuesday, said it was “reluctant to back away from our call of a 4.6% peak just yet”.
“When and whether we get to that level is a little more uncertain in the wake of today’s pause,” ANZ’s head of Australian economics, Adam Boyton, said.
