Further interest rate hikes by the Reserve Bank of Australia (RBA) remain firmly on the table despite the central bank announcing its second consecutive pause on Tuesday.
The RBA board elected to keep rates on hold at an 11-year high of 4.1 per cent in August but did not rule out the possibility of hiking rates again as part of its efforts to bring down inflation.
“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,” outgoing RBA governor Philip Lowe explained in his post-meeting statement.
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
Dr Lowe acknowledged the declines observed in the consumer price index (CPI) but warned that, at a headline rate of 6.0 per cent during the June quarter, inflation is “still too high”.
“Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated,” the RBA governor noted.
The RBA expects that CPI inflation will continue to decline moving forward. Previewing updated forecasts from the upcoming statement on monetary policy due out on Friday, Dr Lowe said that inflation was anticipated to return to the 2–3 per cent target range in late 2025.
In his post-meeting statement, Dr Lowe also indicated greater data dependency by the RBA when it comes to making future rate decisions.
“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 the data and the evolving assessment of risks,” he said.
“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.”
Russel Chesler, head of investments and capital markets at VanEck, suggested that at least one more rate hike is on the horizon on the back of the RBA’s latest decision.
“The RBA hitting the pause button today increases the risk of services inflation remaining elevated. A 25 basis point hike would have mitigated the risk of a tight labour market fuelling further wage increases, inflation still hovers at twice the RBA’s target level,” he said.
“We are now nearing the end of the hiking cycle, but consumers have no cause to cheer yet. We believe the central bank will need to hike one to two more times to reign in lingering inflation and wages risk.”
HSBC chief economist Paul Bloxham, who forecast that the RBA would deliver a hike this month, noted that the tightening cycle may be at its end.
“The 400 bp already delivered may be enough to get inflation to fall back the RBA’s target band fast enough for the central bank to be content to sit still and wait,” he said.
“On the other hand, with services inflation still high and the jobs market still tight, there remains a risk the RBA still needs to hike a bit further to deal with upside risk to it achieving its inflation target over an acceptable time horizon.”
HSBC’s central case still has the cash rate peaking at 4.35 per cent, albeit with the risk that interest rates have already reached their peak.
Meanwhile, AMP chief economist Shane Oliver asserted that the RBA had already done more than enough to slow the economy in order to bring inflation back to target.
“Continuing to raise interest rates will only add to the already very high risk of unnecessarily knocking the economy into recession. At the very least, the economy is likely to have slowed substantially by year end or early next year with unemployment starting to rise faster than the RBA is allowing for,” he suggested.
“Given the lags involved and the increasing signs that the monetary tightening is working, it makes sense for the RBA to sit back and exercise patience over the next few months so it can better assess the impact of the rate hikes.
“While the risks for interest rates are still on the upside, those risks have become a lot more balanced now and future moves will be more data-dependent. We think that the cash rate is either at or very close to the top.”
ANZ, which correctly predicted the RBA’s pause alongside fellow big four bank NAB, remains of the belief that the RBA is now on an “extended pause”.
“Friday’s SoMP will provide additional detail on the RBA’s thinking. But for now, we see nothing in today’s decision or statement to push us off our view that the RBA is now on an extended pause as it examines how the 400 bp of monetary tightening to date washes through the economy,” said ANZ head of Australian economics Adam Boyton.
