© Reuters. FILE PHOTO: FILE PHOTO: A man smokes next to the Reserve Bank of Australia headquarters in central Sydney, Australia February 6, 2018. REUTERS/Daniel Munoz
By Stella Qiu
SYDNEY (Reuters) -Australia’s central bank on Tuesday left its cash rate unchanged at 3.6% to break a run of 10 straight hikes, saying it wanted additional time to assess the impact of past increases as the economy slows and inflation has peaked.
Wrapping up its April policy meeting, the Reserve Bank of Australia (RBA) did warn that some further tightening of monetary policy “may well be needed” to ensure that inflation returns to the 2-3% target band.
Markets had been wagering on a pause, while analysts were split on whether the bank would hike again given the still high level of inflation.
Investors reacted by pushing the Australian dollar 0.4% lower to $0.6758. Three-year bond futures were up 9 ticks to 97.14, with futures now also leaning towards a pause in May, implying hikes are essentially over.
“The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty,” said governor Philip Lowe.
Lowe acknowledged that inflation has peaked in the country, with goods price inflation expected to moderate over the months ahead, and noted that household spending is slowing in the face of cost-of-living pressures and high interest rates.
“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.”
INFLATION RISKS
The RBA has raised rates by a total of 350 basis points to tame runaway inflation, which has peaked at 7.8% in the final quarter last year and slowed to 6.8% in February, but still remains way above the central bank’s target.
Consumer demand is also levelling off, although the labour market is tight with the jobless rate hovering at near 50-year lows and job vacancies sharply above pre-COVID levels, while business surveys are also pointing to resilient conditions.
Housing prices are showing early signs of bottoming out, but the construction sector is in a hole, with high costs prompting the collapse of a few home builders, highlighting pockets of stress across the economy.
One risk ahead is the first-quarter inflation data due in late April, which could still surprise on the upside as rents and utility prices are still rising quickly, possibly pressuring the the RBA to hike again, some economists say.
“We still expect the RBA to lift rates by 25bp in May before bringing its hiking cycle to an end,” said analysts at Capital Economics.
“What’s more, given our expectation that services inflation will remain stubbornly high, we don’t expect interest rate cuts before Q2 2024.”
Reducing the pressure for the RBA to hike again, markets are pricing in more aggressive rate cuts from the Federal Reserve by the year end after the recent troubles at U.S. regional banks and the Credit Suisse takeover fuelled concerns about tighter lending conditions.
Lowe said the banking turmoil in the United States and Switzerland have stoked volatility in financial markets, but that Australia’s banking system is strong and well placed to provide credit to the economy.
“The RBA do not expect the turmoil in the U.S. and Swiss banking systems will affect credit availability in Australia,” said Sean Langcake, head of macroeconomic forecasting for BIS Oxford Economics.
“Nevertheless, tighter financial conditions are expected, which will work to dampen inflation and obviate some of the need for further rate rises.”
