Reserve Bank governor Phil Lowe drops hint on inflation fight as rates on hold

RBA governor Philip Lowe has used five words to hint at a big change in Australia’s inflation crisis.

RBA boss Philip Lowe has used his second last rates decision to drop a big hint that the seemingly endless cycle of rate hikes smashing homeowners could soon come to an end.

In a statement delivered on Tuesday, after the central bank kept rates on hold for the second month in a row, Dr Lowe signalled for the first time since May last year that Australia was on track to bring inflation back to target by 2025.

Tuesday’s pause will give the RBA more time to assess the impact of previous rate hikes, having increased the official cash rate by 4 per cent since the first hike in May 2022.

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow,” Dr Lowe said,

Inflation numbers released last week showed that price pressures eased to 6 per cent in the year to June, down from 7.8 per cent in the December quarter.

Federal Treasurer Jim Chalmers said Australians would be breathing a “sigh of relief” after today’s rates decision. Picture: NCA NewsWire / Martin Ollman

Speaking in parliament immediately after the decision was announced, Treasurer Jim Chalmers said the rate pause would come as a “welcome reprieve”.

“There will be a sigh of relief around Australia, but people are still under the pump,” Dr Chalmers said.

Responding to the decision, economists signalled that the central bank had likely reached, or was very close to reaching, the end of its tightening cycle.

Chief economist for ANZ, Adam Boyton, said that the RBA was now on an “extended pause” as it examined how the 400 basis points of monetary tightening washed through the economy.

Chief economist at ANZ, Adam Boyton, has predicted the cash rate has peaked at 4.10 per cent. Picture: Supplied

“If the bank does move in the near term … higher interest rates are much more likely than cuts,” Mr Boyton said.

Oxford Economics Australia head of macroeconomic forecasting, Sean Langcake, said the RBA was increasingly confident that the hiking cycle to date was sufficient to curb inflation.

“With economic momentum waning, it seems unlikely the RBA will be presented with more compelling arguments to raise rates than they would have heard at today’s meeting. It looks increasingly likely that we have reached the peak of the cash rate cycle,” Mr Langcake said.

However, not all economists shared the view that the Australian economy would be spared from any further rate hikes.

Following the decision, Betashares chief economist David Bassanese, said: “sufficient resilience in consumer spending in the coming months will see the RBA raise rates one last time in November.”

Not out of the woods just yet: outgoing RBA governor Philip Lowe may still inflict his final rate hike next month. Picture: NCA NewsWire/Tertius Pickard

Governor Lowe also indicated that reprieve from rate rises may be short lived as he pointed to “significant uncertainties” that may necessitate further rate hikes in the months ahead.

The soaring price of services, including rental and energy costs, the delayed impact of monetary tightening, and the fragility of household consumption will weigh heavily on the RBA’s decision making in the months ahead.

Despite signalling more positive news in the fight against inflation, the RBA has retained its forward guidance, stating: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame.”

Markets are now expecting only 13 basis points of additional RBA rate hikes in the months ahead.

Originally published as Reserve Bank governor Phil Lowe drops hint on inflation fight as rates on hold