RBA keeps rates on hold as inflation softens

The RBA holds rates at 4.1 per cent, as outgoing governor Philip Lowe recognised the ‘painful squeeze’ being felt by many.

The Reserve Bank has held the cash rate at 4.1 per cent for a third straight month, as outgoing governor Philip Lowe recognised the “painful squeeze” being felt by many households but warned the battle against inflation was not yet done.

In a statement accompanying the decision, Dr Lowe said the dozen rapid-fire rate hikes since May last year “are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so”.

“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,” he said.

Still, bringing inflation back under control remained “the board’s priority”, and the central bank would do “what is necessary to achieve that”.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will continue to depend upon the data and the evolving assessment of risks,” Dr Lowe said.

Jim Chalmers in parliament said the latest rates announcement was “a third moment of relief and reprieve for many Australians and small businesses that we know are already under the pump, particularly those who have come off fixed (mortgage) rates, and the half-a-million more who will transition before the end of the year”.

“We understand that Australians are still under pressure even after this decision today,” the Treasurer said.

Dr Lowe will deliver a final speech on Thursday, before deputy governor Michele Bullock starts in the top job from September 18.

JP Morgan chief economist Ben Jarman said Ms Bullock was “very much the continuity candidate”.

“We don’t see any major shifts in the inflation targeting strategy from the leadership change itself, and continue to see the RBA as nearly done, with only one more hike to come” in November, Mr Jarman said.

RBC Capital chief economist Su-Lin Ong said there was “clearly no desire” in the central bank board to hike again, although “there’s still a risk that stickier than expected inflation and wage pressures will force the RBA to hike again” towards the end of the year.

ANZ head of Australian economics Adam Boyton, however, said if the next move in rates was more likely to be up than down – although that prospect remained “a considerable way off”.

The interest rate reprieve came as new data showed export volumes would help prop up the economy through the June quarter, with economists confident that a mining-led plunge in business profits over the three months would not be enough to drive growth into reverse.

Westpac senior economist Andrew Hanlan said he now expected Wednesday’s national accounts would show real GDP expanded by 0.4 per cent in the June quarter, an acceleration from the paltry 0.2 per cent rate through the first three months of the year.

But annual growth would slow sharply from 2.3 per cent in March to 1.8 per cent in June, Mr Hanlan said, ahead of an anticipated further slowdown through 2023 as households pull back on spending.

Dr Lowe in Tuesday’s statement warned there were “significant uncertainties around the outlook”, including the prospect of services inflation proving stickier than feared, risking further rate rises, and the increasingly alarming slowdown in China’s economy.

There was also uncertainty around the outlook for consumption, “with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income”.

“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,” Dr Lowe said.

Monetary policymakers have been encouraged by an ongoing disinflationary trend that has seen consumer price growth drop from a peak of about 8 per cent in December, to below 5 per cent in July.

With the RBA not expecting inflation to return to the top of the 2-3 per cent target range until mid-2025, Dr Lowe has made maximum use of his flexible mandate in order to retain as much of the employment gains made in the wake of the pandemic.