Australia Pauses Interest Rate Rises, Cost of Borrowing Stay
The Reserve Bank of Australia (RBA) has left its interest rate unchanged at 3.60% following the latest meeting of the Bank’s Board, ending a run of ten consecutive rate increases which began in May last year.
Reserve Bank of Australia Governor Phillip Lowe said in a statement that the decision to not hike rates this month was made considering the cumulative rate rises of 3.5% made over the current rate hike cycle.
As there is often a time lag for interest rate increases to take full effect in the economy, it was thought that a pause in escalating rates would be the most appropriate move. This would give the Board of the Bank time to fully assess just what impact the rate rises have had.
However, the Bank did warn that to achieve its inflation target of 2-3%, further monetary tightening may be necessary.
In the meantime, the Bank’s is to keep the economy on an even keel, but Governor Lowe admitted that the pathway to a soft economic landing is narrow.
The next interest rate announcement will be made on 2nd May.
Recent CPI indicators suggest that inflation may have peaked in Australia, according to the Bank.
Annualized inflation for the year to February fell to 6.8%, a significant reduction in price growth compared to the 8.4% year-on-year cost rise last December.
Governor Lowe said that he expected prices to continue to decline over the months ahead, due to global developments and a softening of domestic demand.
The Bank’s forecast is for inflation to fall to around the 3% mark by the middle of 2025.
Medium-term inflation expectations remain well anchored, and Lowe said that it is important that this remains the case. Yet there are current patterns that could worsen the inflation problem, as rents are increasing at a faster rate than seen in recent years, and utility prices are also growing at pace.
The labour market also remains tight, with the unemployment rate at a near 50-year low. Wage growth is continuing to increase in response to the tight labour market and high inflation.
The Board of the RBA are wary of the risks of a price-wags spiral, given the limited spare capacity in the economy alongside the low rate of unemployment. It has also vowed to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.
The RBA believes that inflation is moderating globally, despite service price inflation remaining high in many economies.
The recent banking troubles that have been experienced in the United States, with the collapses of the Silicon Valley Bank and Signature Banks, and in Switzerland, are so far seen as unlikely to have any knock-on effect. Governor Lowe asserted that the Australian banking system is strong and is well-placed to provide credit where it is needed.
The decision to halt raising interest rates will come as a surprise to the big four banks in Australia: ANZ, CBA, NAB and Westpac. All of them forecasted that the RBA would lift rates again in a further quarter-point rise.
The research group Capital Economics were proven right in expecting a pause in rate rises.
ANZ also revealed in a recent study that consumer confidence increased by 0.l % during the third week in March.
The RBA’s latest verdict is highly likely to have a further positive impact on attitudes to mortgage repayment. Yet the view of future economic conditions remained a bleak one, as there was a 2.6% drop in assurance over the levels of economic stability ahead.
The Australian Dollar predictably did not react well to the RBA’s decision and fell against almost all major currencies. The AUD/USD currency pair at the time of writing a few hours after the release had fallen by about 0.40%, which is not much.
Just as predictably, the benchmark S&P ASX 200 stock market increased by 0.18% closing at 7,236, in response to finally seeing a break-off in rate increases.