The Reserve Bank of Australia Board has decided to leave the cash rate target unchanged at 4.1% and the interest rate paid on Exchange Settlement balances unchanged at four per cent.
Interest rates have increased by four percentage points since May last year. “The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook,” the RBA said in a statement.
“Inflation in Australia has passed its peak and the monthly CPI indicator for May showed a further decline. But inflation is still too high and will remain so for some time yet. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. For these reasons, the Board’s priority is to return inflation to target within a reasonable time-frame.
“Growth in the Australian economy has slowed and conditions in the labour market have eased, although they remain very tight. Firms report that labour shortages have lessened, yet job vacancies and advertisements are still at very high levels. Labour force participation is at a record high and the unemployment rate remains close to a 50-year low. Wages growth has picked up in response to the tight labour market and high inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” the RBA said.
On the RBA’s decision to hold the cash rate at 4.1%, CreditorWatch Chief Economist Anneke Thompson says, “There is still concern about the very tight labour market and underlying inflation. Looking overseas, inflation in areas that are typically labour intensive is only decreasing very slowly, while price rises for goods are coming down faster. This is the same in Australia, where we recorded a decline of 0.4% in the price of clothing and footwear.
“On the flip side, price rises of meals out and takeaway food accelerated over the year to May 2023, rising to 7.7% from 7.3% the month prior. This is likely caused by continued high labour, energy and food prices forcing restaurant and café owners to continue to pass on these additional costs. On the demand side, the roughly 30% of Australians who neither rent nor have a home loan, by and large, continue to spend on services and meals out,” Ms Thompson said.
“We are now nearing, if not at, the point in the monetary policy tightening cycle where further rises to the cash rate will have limited further effect. Households with a home loan have already endured the fastest and steepest rise to the cash rate in history, with most of these people unable to increase income enough to offset their higher interest repayments. The savings rate of Australians is now below pre-Covid levels, and Covid era savings will have been exhausted already by many people. Therefore, it is highly likely that these households with a home loan (roughly 40% of Australian households when including investors) have already pulled back significantly on their discretionary spending. The RBA will now be hoping businesses slow their hiring intentions, taking some pressure off wages and reducing inflation in labour-intensive parts of the economy.”
Deloitte Access Economics partner Stephen Smith says the decision to pause rate hikes shows the RBA has realised the economy is on a knife’s edge and that it must pivot to achieve its goal of threading a “narrow path” through current economic conditions. “Growth is already slowing sharply, led in particular by the two most interest-rate sensitive components of economic activity – consumer spending and housing investment. Moreover, a significant part of the pain – of fixed-rate mortgage holders resetting to variable rates – is yet to be felt in full. It is notable that Governor Philip Lowe has dropped reference to the economy remaining on an “even keel” in his statement announcing today’s monetary policy decision,” Mr Smith said.
“The pace of inflation has peaked and is moderating, wage growth is not excessive, medium-term inflation expectations are not rising, and the RBA’s own research shows that at least half of inflation in Australia over the past year has been driven by supply factors. Today’s pause is welcome and will be a relief to households. It is also consistent with the fact that central banks are impotent in the face of supply-side inflation pressures,” he said.
“We should all be inflation hawks. Price growth which is elevated for extended periods, or is volatile, is damaging for the economy and prosperity. But price growth which is primarily caused by issues of supply – be it global shipping costs and import prices, the costs of a disorderly energy transition, or higher rents and house prices because of a handbrake on housing construction – cannot be readily solved by higher interest rates.
“Monetary policy is a spent weapon. We must turn towards fiscal policy, investment and innovation to lift productivity; competition policy to improve efficiency and erode market power; and tax policy to boost prosperity.”
