RBA Pauses Monetary Policy Tightening

Australia’s central bank decided to halt its monetary policy tightening in order to assess the full impact of the cumulative 350 basis points increase since last May but policymakers pointed out that some further tightening may be needed to bring inflation back to the target.

The board of the Reserve Bank of Australia left the cash rate target unchanged at 3.60 percent. The outcome of the meeting matched economists’ expectations.

The bank also kept the interest rate on Exchange Settlement balances unchanged at 3.50 percent.

The decision to pause the interest rate at the highest level since May 20212 came after ten consecutive rate hikes.

The board observed that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt, RBA Governor Philip Lowe said.

Moreover, the decision to hold the rates would provide additional time to assess the impact of the previous hikes to date and the economic outlook, Lowe noted.

Nonetheless, the board said it expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.

In assessing when and how much further interest rates need to rise, the board will take into account the developments in the global economy, household spending pattern and the outlook for inflation as well as the labor market, Lowe observed.

The governor repeated that the board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.

Inflation is forecast to ease this year and next, to around 3.0 percent in mid-2025. And the economy is estimated to grow below trend over the next couple of years as higher interest rates, the cost of living crisis and falling house prices weigh on household spending.

As economic growth slows, unemployment is expected to increase, said Lowe.

Capital Economics’ economist Abhijit Surya expects the RBA to lift rates by 25 basis points in May before bringing its hiking cycle to an end.

“What’s more, given our expectation that services inflation will remain stubbornly high, we don’t expect interest rate cuts before Q2 2024,” the economist added.

Regarding the recent banking system problems, Lowe said the Australian banking system is strong, well capitalized and highly liquid.

Australian banks are well placed to provide the credit that the economy needs, Lowe added.

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