The Reserve Bank of Australia (RBA) opted to leave the cash rate on hold at 3.6 per cent following its latest monetary policy board meeting on Tuesday (4 April).
In his post-meeting statement, RBA governor Philip Lowe said the board decided to provide “additional time” to assess the impact of 3.5 per cent in cumulative increases to the cash rate since the central bank commenced its tightening cycle in May 2022.
“The board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt,” he said.
Governor Lowe acknowledged global inflation “remains very high”, but said in Australia, the latest data suggests inflation has peaked and growth has slowed.
The statement also referenced recent market volatility in response to banking collapses in the United States and the demise of Swiss lender Credit Suisse.
However, governor Lowe noted the local labour market “remains very tight”, contributing to continued wages growth — albeit less pronounced.
As such, the RBA remains open to actioning additional interest rate hikes in the near-term.
“The board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” governor Lowe added.
“…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.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
But according to Commonwealth Bank’s head of Australian Economics, Gareth Aird, the post-meeting statement is more dovish than anticipated.
“The governor’s statement indicates that the decision to leave the policy rate on hold may not have been as close a call as we thought,” he said.
He noted a softening in the central bank’s rhetoric, with previous references suggesting further tightening “will be needed” replaced with “some” tightening “may be needed”.
Mr Aird observed: “These changes indicate that the RBA board is less convinced that they will hike the cash rate again.
“To be clear, the board has still retained a hiking bias, as we anticipated. But it is a more watered-down version of the previous statement.”
As such, CBA has claimed the April pause may have signalled a permanent end to the RBA’s hiking cycle, but added, for now, it would retain its projection of a terminal rate of 3.85 per cent.
“We believe the risk to our call is that the current 3.6 per cent cash rate is the peak in this cycle and the next move is down,” Mr Aird said.
Paul Bloxham, chief economist at HSBC Australia, has taken a stronger stance, calling a prolonged monetary policy pause.
“We think the RBA is done with hiking its cash rate, and likely to be on hold for the next few quarters,” he said.
Looking ahead, CBA said it continues to expect the RBA to cut rates by 50 bps in the fourth quarter of 2023, followed by a further 50 bps in easing over the first half of 2024.
Meanwhile, peer bank ANZ continues to project a terminal rate of 4.1 per cent.
“[We] continue to think inflation will prove persistent enough to require the RBA to tighten monetary policy further in the months ahead,” ANZ stated.
RBA governor Philip Lowe is expected to shed light on the central bank’s monetary policy strategy in an address on Wednesday (5 April).
