Reserve Bank of Australia hits pause on its interest rates blitz

The Reserve Bank has paused its extraordinary monetary blitz, but warned there could be more torment for home borrowers.

Reserve Bank governor Philip Lowe says the Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook’. Picture: Nikki Short

The Reserve Bank has paused its extraordinary monetary blitz, but warned there could be more torment for home borrowers as it assesses the ruin from a rapidly slowing economy and headway in the fight against inflation

On Tuesday RBA governor Philip Lowe said the board recognises the full effect of the “substantial increase” in its cash rate from 0.1 per cent in May to 3.6 per cent last month “is yet to be felt”.

“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook,” Dr Lowe said after its monthly meeting.

The central bank chief said the path to avoiding a recession, the so-called “soft landing” it was seeking, “remains a narrow one”, as economists pointed to worsening conditions, including plunging buyer confidence and spending.

Deloitte Access Economics partner Stephen Smith said “there is evidence the retail sector is in recession”.

“Although Australians will approve of the monetary policy decision, most will need to keep a close eye on the household budget for the remainder of the year,” Mr Smith said.

The rates halt was welcomed by business groups, the home construction industry, mortgage holders and the Albanese government, which is under growing community pressure to ease household living costs in the May 9 budget.

Jim Chalmers said the RBA’s decision “will be a welcome reprieve for a lot of Australians”.

“But we know that people are still doing it tough – they’re still under the pump,” the Treasurer told ABC radio’s PM.

“Inflation still is the primary challenge in our economy, and that’s what makes it the primary focus of our economic plan, and also the upcoming budget in May. There’s no use sugar-coating the fact that inflation will be higher than we’d like for longer than we’d like.”

After 10 consecutive rate hikes, most economists were expecting the RBA to halt its aggressive tightening this month.

A household with a $750,000 mortgage would now be paying $1474 more in monthly interest payments since the first of 10 rate hikes commenced last May.

In what economists saw as a softening in language from the previous month, Dr Lowe said the Board expects “that some further tightening of monetary policy may well be needed” to ensure inflation returns to its 2 to 3 per cent target range.

He said inflation was likely to decline this year and next, to around 3 per cent in mid-2025. In the year to February, the consumer price index rose by 6.8 per cent.

 

Dr Lowe said the pause comes amid “an environment of considerable uncertainty”.

“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” he said.

“The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

Westpac chief economist Bill Evans said he expected the RBA to raise the cash rate next month by 25 basis points to a “terminal” 3.85 per cent. “That decision will be in the context of underlying inflation holding well above the target level, only slowing moderately, in an economy where the unemployment rate remains near 50-year lows and dismal productivity exacerbates the eventual impact of wages growth on inflation,” Mr Evans said.

Dr Lowe noted “global inflation remains very high” and “the outlook for the global economy remains subdued, with below-average growth expected this year and next”. He said the recent banking system problems in the US and Switzerland have resulted in volatility in financial markets and a reassessment of the outlook for global interest rates.

“These problems are also expected to lead to tighter financial conditions, which would be an additional headwind for the global economy,” he said.

“The Australian banking system is strong, well capitalised and highly liquid. It is well placed to provide the credit that the economy needs.”

Betashares chief economist David Bassanese said the pause means the RBA was one of the few central banks in recent weeks not to raise interest rates in the face of “global financial jitters”.

“What’s more, the RBA has also paused interest rates despite higher underlying inflation and lower official interest rates than in the United States,” he said.

The US Federal Reserve’s policy rate range is 4.75 to 5 per cent.

Dr Lowe said the RBA “remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment”.

“Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”

“There is further evidence that the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a substantial slowing in household spending,” Dr Lowe said. “While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.”

The ANZ and Roy Morgan survey showed consumer confidence rose slightly last week but the index remained below 80 points for a fifth consecutive week, the longest time below that mark since the start of the weekly series in October 2008. ANZ senior economist Adelaide Timbrell said confidence among those paying off a mortgage fell ahead of Tuesday’s RBA meeting.