Published : 1 year ago, on 12/07/2023

The Reserve Bank of Australia paused again but keeps the door open to more hikes

By Nikos Tzabouras, Senior Market Specialist at FXCM

The Reserve Bank of Australia held rates steady in April, after ten consecutive rate increases. Policymakers did not stay on the sidelines long though, subsequently delivering two back-to-back hikes, which brought the official cash rate to 4.1%, the highest level in eleven years.

The central bank hit the pause button again on Tuesday, to “assess” the economic outlook and the cumulative impact of its monetary tightening, which amounts to 400 points since the May 2022 lift-off.

The decision was not exactly a surprise, but there was quite some uncertainty going into the meeting, given the start-stop backdrop.

High Inflation

The latest monthly data from last week revealed a significant deceleration in the Consumer Price Index (CPI), which allowed officials to stay on the sidelines on Tuesday. Headline inflation came in at 5.6% y/y in May, in what was the smallest rise in more than a year.

The central bank assumes that inflation “has passed its peak”, having moderated to 7% y/y in the first quarter. However, it is “still too high” and far from the 2-3% target. Further, policymakers believe it will remain elevated for “some time yet” and don’t expect it to hit the top of that range before mid-2025, according to May’s projections.

Tight Labor Market

The Australian economy added 75,900 jobs in May, which was the biggest increase in over a year. Unemployment ticked down to 3.6% and close to its five decade lows and the RBA still views the labor market as “very tight”, despite acknowledging loosening conditions.

Furthermore, wage growth continues to pick up with the Wage Price Index rising to 3.7% y/y in the first quarter, the highest in around eleven years, while the minimum wage in Australia rose by 5.75% this month.

Door Open to More Hikes

The economy meanwhile “has slowed”, as the 2.7% y/y GDP expansion in Q4 was the smallest in nearly two years and the central bank expects “below trend growth”, having lowered its 2023 projections. This slowdown, along with the recent inflation moderation and the easing in labor conditions policy, led policymakers to Tuesday’s hold.

However, inflation remains high and far from its target, while the labor market is still tight due to elevated wages and historically low unemployment. These factors keep pressure on a sustained restrictive stance and show that the RBA may have more work to do.

Policymakers kept more policy firming in play, reiterating that “some further tightening” in monetary policy may be needed to bring inflation back to the 2-3% target in “a reasonable timeframe”. Even though they kept the door open to more hikes and maintained a hawkish bias, the forward guidance was not particularly forceful and sustained the uncertainty around the monetary policy outlook.

Market Reaction

The Australian stock market rose after the decision. AUD/USD reacted lower, but quickly covered most of the losses, highlighting the uncertainty around the next steps.

Messy Central Banking

Global monetary policy has been a messy affair this year, as major central banks appear to be all over the place recently, making it harder to assess the next steps. The RBA is one of the best examples, since it paused its tightening cycle, restarted it and then paused again – all within just four months.

It is hardly the only one though, since the Fed decided to leave rates unchanged in June after ten consecutive increases, but its updated projections imply an additional 50 basis points worth of hikes. The Bank of England appeared to have been tightening reluctantly over recent months but was forced to reaccelerate the pace with an 0.5% rate rise in June, after another hot inflation report.

The Bank of Canada, which was the first major central bank to stay on the sidelines this year, was forced to restart tightening last month, after an uptick in inflation. The Reserve Bank of New Zealand, which is at the forefront of monetary tightening, increased rates to 5.5% but its updated forecasts suggest that the terminal level has been reached.

The Bank of Japan meanwhile, is at the other end of the policy spectrum, with negative rates and yield curve control, having shown no real inclination to abandon its ultra-loose stance any time soon.

With central banks all over the globe attracting attention from politicians and ordinary citizens pressured by inflation and rising mortgage rates, their decisions are set to come under increasing scrutiny in the months ahead.