RBA ends hike cycle, hints at further increases

The Reserve Bank of Australia’s (RBA) monetary policy board has held the official cash rate at 3.6 per cent — ending a 10-month-long hiking cycle, which commenced 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. The board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook," the RBA said. 

Markets had anticipated the pause with the ASX’s RBA Rate Indicator suggesting a hold was all but certain. 

However, analysts and economists were split, with many, including major banks, projecting an additional 25 bps increase, taking the cash rate to 3.85 per cent. 

NAB’s head of market economics, Tapas Strickland, said a hike would have been “justified” but conceded it was a “lineball decision”.  

“The risk is the RBA pauses and retains a hiking bias, preferring to err on the side of a more protracted battle against inflation until or unless its hand is forced by the data,” he said.

The most recent consumer price index (CPI) suggested the economy had entered a disinflationary period, with annualised inflation falling for the second consecutive month — down from 7.4 per cent in January to 6.8 per cent in February. 

As at February 2023, annualised inflation was 1.6 per cent lower than the peak of 8.4 per cent in December 2022. 

Retail sales also grew just 0.2 per cent in February, down from a 1.8 per cent rise in January, providing further evidence of weakening consumer sentiment. 

Moreover, wages grew just 0.8 per cent in the three months to 31 December, slowing from 1.1 per cent in the previous quarter and falling below market expectations of a 1 per cent rise. 

This coincided with weakness in aggregate economic activity, with GDP growth slowing to 0.5 per cent over the fourth quarter of 2022 — below market expectations of 0.8 per cent.

However, labour market conditions remain strong, with the seasonally adjusted unemployment rate falling from 3.7 per cent in January to 3.5 per cent in February. 

Business conditions have also withstood market volatility, with NAB’s monthly business survey suggesting business conditions remain well above the long-run average. 

While local economic indicators were mixed, instability in the global banking system supported the case for a pause. 

In the month proceeding the RBA’s last monetary policy call, three US banks collapsed, and Swiss giant Credit Suisse accepted a forced takeover from local competitor UBS. 

The banking failures were largely attributed to poor liquidity management exposed by aggressive monetary policy tightening. 

But even before instability in the banking system came to the fore, RBA governor Philip Lowe hinted at a looming pause to the cash rate. 

“We are closer to a pause and it’s a matter of logic really, as you increase interest rates higher you get closer to the point where it is appropriate just to stop for a while and just assess the flow of data,” he told the AFR Business Summit on Wednesday (8 March). 

“We’ve done a lot in a short period of time and at some point, it’s going to be appropriate to sit still and assess the collective effects of that.”

RBA governor Lowe is set to present a speech on Wednesday (5 April) to shed light on the central bank’s monetary policy strategy. 

In the initial board statement issued on Tuesday, the RBA did, however, concede that it expects that "some further tightening" of monetary policy "may well be needed" to ensure that inflation returns to target.