The Reserve Bank’s decision on Tuesday to leave the cash rate stable at 4.1 percent is good news for Australian mortgage holders, but a hint of further increases has prompted an economist’s warning that doing so would help little to further combat inflation.
The RBA is sticking with its aggressive monetary policy of raising the cash rate from 0.1 percent last April to 4.1 percent to curb inflation, and has hinted that further tightening may be needed in the coming months to bring it down further. .
While inflation is still higher than the bank’s target of 2 to 3 percent at 5.6 percent in May, it is past its peak and on a downward trend, and some experts say the focus should now be on on supply problems, warning that raising rates would have little impact on further reining in inflation.
Deloitte Access Economics partner Stephen Smith said the decision to hold steady was consistent with the “fact” that central banks are “powerless” in the face of “supply-side inflationary pressures.”
He said it was remarkable that Governor Lowe had stopped referring to the economy remaining in “balance.”
“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 during the last year it has been driven by supply factors. ,” he said.
He said that monetary policy was a “worn weapon” and that the focus should now shift to “fiscal policy, investment and innovation to increase productivity, competition policy to improve efficiency and erode market power, and fiscal policy to boost prosperity”.
“We have been saying for months that the RBA should put rates on hold,” he said.
“In a world where inflation is driven by supply, interest rate hikes are not effective and a turn towards fiscal policy is necessary.”
Finance Minister Katy Gallagher said the government was “working alongside the Reserve Bank, not against it”.
She said the government’s commitment to save, where appropriate, rather than spend has put the budget in a better position than a year ago, and would help alleviate the inflation problem sooner rather than later.
“Today’s decision is good news, and I know that for households across Australia it will be good news,” he said.
“We remain absolutely focused on the job we need to do, which is to provide cost-of-living relief where we can, without increasing inflation, by investing in a more productive and resilient economy.”
Governor Philip Lowe said the decision to pause was partly because higher interest rates were working “to establish a more sustainable balance between supply and demand” but also because the economic outlook was shrouded in much uncertainty.
He said that while inflation had passed its peak, it would remain “too high” for some time, suggesting further rate hikes in the coming months to bring it back under control as soon as possible.
“If high inflation were to become entrenched in people’s expectations, it would be very expensive to bring it down later, which would mean even higher interest rates and a further rise in unemployment,” he said.
“For these reasons, the Board’s priority is to return inflation to the target within a reasonable period of time.
“Further monetary policy tightening may be required to ensure inflation returns to target in a reasonable amount of time, but that will depend on how the economy and inflation evolve.”
Dr Lowe said the pause would allow the Board to further assess the state of the economy, the economic outlook and “associated risks”.
Sean Langcake, head of macro forecasting at Oxford Economics Australia, said that while the rate pause was good news for struggling mortgage holders, he cautioned that there was “still an aggressive tone” in Tuesday’s statement.
“The RBA will be very sensitive to any upside surprises in the next CPI release,” he said.
“The upside risks to inflation cited last month remain present and we expect to see two more rate hikes in the coming months.”
NAB executive Megan Bond said the bank’s economics team was forecasting “another couple of hikes.”
“While the news is positive today, this is the time for people to take advantage of the pause and plan ahead to find out if there are simple changes you could make to future-proof your budget and get ahead of the last 12 price increases. rates. ” she said.
“ If you can manage it, one thing to consider is topping up your home loan clearing account to help save on interest.
Barclays Australia said it believed the RBA was now closer to the end of its aggressive series of hikes.
“We expect a final raise in August before the bank goes on hold. We expect the cuts to begin in the first quarter of 2024,” they said in a statement.