Australia’s Official Cash Rate Remains Steady for 2nd Month

A vendor stocks his stall with fresh produce at the Queen Victoria Market in Melbourne on July 4, 2023 after the Reserve Bank of Australia (RBA) surprised analysts by leaving interest rates on hold at 4.1 per cent in July. (Photo by William WEST / AFP) Photo by WILLIAM WEST/AFP via Getty Images

The Reserve Bank of Australia (RBA) has held off on its interest rate hiking cycle for another month to observe how the economy responds to previous rate hikes.

After the latest board meeting, RBA Governor Philip Lowe announced that the central bank would keep the official cash rate unchanged at 4.1 percent for August, following a similar move in July.

This comes after the annual inflation rate dropped from seven percent in the March quarter to six percent in the June quarter, surprising markets and economists.

While there was a sharp fall in goods inflation during the quarter, inflation in services experienced its highest annual increase since the introduction of the goods and services tax in 2000.

Treasurer Jim Chalmers welcomed the bank’s decision, saying it would bring a reprieve to Australian families.

“Australians are still under the pump, even as inflation moderates and even after this decision today,” he said.

Uncertainty Remains as Inflation Is Still Too High

In light of the downward movement in inflation, the governor said higher interest rates were aimed at balancing supply and demand in the economy. However, he noted the current inflation rate of six percent was still too high.

The RBA forecasted that inflation would drop to around 3.25 percent by the end of 2024 and to the two-to-three percent target range in late 2025.

However, the bank pointed out that there were uncertain factors in the current economy, which would affect price growth.

“Services price inflation has been surprisingly persistent overseas, and the same could occur in Australia,” Mr. Lowes said in a statement.

“There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.”

A vendor weighs fresh produce at the Queen Victoria Market in Melbourne, Australia, on July 4, 2023. William West/AFP via Getty Images

The RBA was also concerned about household consumption, which is a major contributor to price growth.

The bank said that while cost pressures and higher interest rates had substantially slowed general consumption growth, many Australian households still had strong purchasing power due to significant savings buffers and higher interest income.

Under such economic conditions, the bank decided to pause the monetary tightening policy to assess the impact of the previous 12 consecutive increases in interest rates and the economic outlook.

Nevertheless, the RBA warned that more rate hikes might be needed to ensure inflation dropped to the desired target within a reasonable timeframe, depending on the bank’s assessment of economic risks in the coming months.

An End to Interest Rate Hikes?

As the RBA holds off interest rate hikes for the second month, economists have different views on when the bank’s monetary policy will end.

Oxford Economics Australia head of macroeconomic forecasting Sean Langcake said the current interest rate hiking cycle might have peaked.

“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,” he said.

Pointing to the change in the governor’s language, Mr. Langcake said the central bank appeared to be comfortable letting inflation stay above their target for a little longer.

In contrast, ANZ Bank economists believed the governor’s statement did not include any special hint to suggest it was a temporary pause.

Meanwhile, a survey of 43 economists by financial comparison website Finder found three-quarters of experts predicted the official cash rate would peak between July and September, with an average cash rate of 4.4 percent.

The majority of them also believed that another housing boom was unlikely to occur under the current interest rate situation.