As a result of the Reserve Bank of Australia pausing its interest rate hikes for only the second time in the past 14 meetings, debtors in Australia have been granted a reprieve, which provides the central bank with additional time to evaluate the status of the economy.
Reserve Bank of Australia decided to keep its official cash rate at 4.1%, which is still the highest level in the past 11 years. The predictions of economists had been split down the middle, with around half of them believing that there would be a pause and the other half predicting that there would be another hike of 25 basis points.
Philip Lowe, the governor of the RBA, stated that the bank required some time to evaluate the effects of a four percentage point increase in interest rates before taking any more action.
“The higher interest rates are working to establish a more sustainable balance that is between supply and demand in economy and will continue to do so,” Lowe said in a statement. “The higher interest rates are working to establish a more sustainable balance that too between supply and demand in the economy.”
“In light of this, and the uncertainty surrounding the economic outlook, the board decided to hold interest rates steady for this month.”
The minutes from the RBA’s board meeting in June added fuel to the fire of speculation that the central bank might delay the implementation of another rate hike. They described the choice to either raise the interest rate or maintain it at its previous level as “finely balanced” last month.
Since then, the Australian Bureau of Statistics has published its monthly consumer price index statistics, which revealed that headline inflation had dropped significantly in May to 5.6%, which was the lowest it had been in somewhat more than a year. The underlying inflation, on the other hand, barely slightly decreased.
As supply chains began to recover from the twin interruptions caused by the Covid epidemic and Russia’s conflict with Ukraine, he projected that a global “deflationary shock” would emerge.
With the exception of April and the most recent increase in July, the Reserve Bank of Australia (RBA) has increased the cash rate 12 times since it began to tighten monetary policy in May 2022. The majority of analysts and market participants anticipate that the central bank will raise the interest rate by at least one more quarter-point to 4.35% in the coming months before it reaches its peak. The halt that took place on Tuesday, however, may only be a temporary measure.
On Tuesday, Lowe indicated that the Federal Reserve may have other tasks to complete.
According to what he had stated, “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe,” but this will depend on how the economy and inflation develop in the future. “The board is unwavering in its commitment to bringing inflation back within the target range, and it will take whatever steps are essential to accomplish this goal,”
As a result of the decision, the value of the Australian dollar decreased in comparison to that of the US dollar on Tuesday afternoon, falling from 66.8 US cents to less than 66.5 US cents. Because investors were betting that borrowing rates wouldn’t climb as much as had been previously anticipated, the stock price increased by approximately 0.5%.
The robustness of the economic data will determine whether or not the RBA will begin raising rates in August or extend the pause until September. The main numbers to keep an eye on leading up to the RBA board meeting on August 1 include the employment numbers for June, which will be released on 20 July, and the consumer price index figures for the June quarter, which will be released on July 26th.
Lowe stated that the central bank would also be monitoring the changes in household expenditure as well as the developments in the global economy.
It is critically important to note that he minimized the danger of pay increases contributing to inflation so far.
There is still a chance that the economy will not enter a recession. Lowe stated that the board was “still expecting the economy to grow as inflation returns to the 2 to 3% target range, but the path of achieving the balance is a narrow one.”
The manner in which consumers responded with their spending to the dual dynamics of increasing interest rates and increased cost-of-living pressures was one of the factors that may steer the economy away from that path. “a significant source of uncertainty” was household consumption, according to the report.
“Growth is already slowing sharply, led in particular by the two most interest-rate sensitive components of economic activity – consumer spending and housing investment,” said Smith. “These two components of economic activity are causing the slowdown.”
“Monetary policy is a weapon that has been used up. In order to increase productivity, we need to focus on fiscal policy, investment, and innovation. We also need to focus on competition policy in order to increase efficiency and reduce market power. Finally, we need tax policy in order to increase prosperity.
