The Reserve Bank of Australia has held the nation’s cash rate steady for the month of August, its first consecutive pause since April last year, citing economic uncertainty.
The Reserve Bank of Australia has held the nation’s cash rate steady for the month of August, its first consecutive pause since April last year, citing economic uncertainty.
The decision leaves rates steady at 4.1 per cent for another month.
Economists were split on the action the RBA would take ahead of its August meeting, with national unemployment steady and consumer price index data showing the nation’s inflation rate slowed over the 12 months to June.
The RBA cited economic uncertainty as cause for its decision, with a hold designed to allow it time to assess the impact of rate rises which have cumulatively lifted the cash rate by four per cent since May last year.
It said medium-term inflation expectations had been consistent with its inflation target, but left room to increase rates further if necessary to return to its target of a 2-3 per cent inflation rate.
"Returning inflation to within target remains the board's priority," outgoing RBA governor Philip Lowe said in the bank's monetary policy statement.
"High inflation makes life difficult for everyone and damages the functioning of the economy."
Mr Lowe said there was significant uncertainty around the economic indicators used to measure the health of the inflation.
"Services price inflation has been surprisingly persistent overseas and the same could occur in Australia," he said.
"There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.
"The outlook for household consumption is also an ongoing source of uncertainty. Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income."
He noted that consumption growth had slowed substantially due to cost of living pressures and higher rates.
The RBA's next rate decision will be made on the first Tuesday in September, and will be Mr Lowe's last before deputy governor Michele Bullock takes on the role.
Rate pause reactions
Speaking on today's decision CoreLogic research director Tim Lawless said a hold would offer a temporary reprieve for mortgage holders but didn't necessarily represent the end of the rate hiking cycle.
"Considering the RBA is working with a mixed bag of key data sets that guide their decisionmaking, another rate hike down the track remains a possibility," he said.
Mr Lawless pointed to lower than expected headline inflation, retail sales decline and weakening GDP growth as examples of data supporting the hold decision.
However, he said job market tightness, low productivity growth and wage increases could all incentivise a rate hike.
Speaking on behalf of the business community, the Australian Chamber of Commerce and Industry said the decision offered valuable breathing space for many businesses.
"The Reserve Bank's decision to hold the official cash rate will provide a desperately needed reprieve for those businesses that have been struggling with rising input costs and the impact of previous rate increases," ACCI chief executive Andrew McKellar said.
ACCI urged the federal government to "hold its nerve" on fiscal policy, and build a more ambitious agenda for productivity growth.
"It will not do Australia's businesses or its people any better by winding the cord of interest rates any tighter," Mr McKellar said.
Deloitte Access Economics partner Stephen Smith said holding was the right decision, and that other action needed to be taken to curb inflation.
"Supply side inflation needs to be tackled through fiscal policy, investment and innovation to lift productivity; competition policy to improve efficiency; and tax policy to boost prosperity," he said.
Mr Smith said the full impact of previous interest rate hikes was yet to be felt, and that the nation was "not out of the woods in its fight against excessive inflation".
"However, the appropriate policy response requires more nuance than a narrow, simplistic assertion of the relationship between unemployment and inflation," he said.
"As is widely accepted, the cost of residential rent and utilities will be a key source of inflation over the next 12 to 18 months.
"Importantly, these cost pressures have arisen as a result of supply pressures, not excessive demand.
"As a result, higher interest rates – which work to dampen demand in the Australian economy – are ineffective at combating this type of inflation.
"In fact, they are likely to make the situation worse by delaying a recovery in dwelling construction."
Ray White Group chief economist Nerida Conisbee noted inflation abroad was beginning to ease in a promising sign for the local economy, but said rental increases remained problematic in Australia.
"As we noted last year when advertised rents started to skyrocket, there is always a lag between advertised rents climbing and an increase in rents in already tenanted properties," she said.
"It is the rents in tenanted properties that is used in the ABS inflation numbers. Increases in advertised rents are starting to slow but it will be some time before this slows down the rental calculation used in the inflation numbers."
Premier Roger Cook called for rate relief at a press conference in Perth this morning.
