The Reserve Bank of Australia has left interest rates unchanged at 4.1 per cent, granting a reprieve for mortgage holders and businesses with loans – and Oxford Economics’ Sean Langcake believes we’re at the peak of the cash rate cycle.
The ASX200 jumped more than 20 points immediately upon the news.
The decision comes after data revealed inflation had eased to six per cent, 0.3 points below the RBA’s predicted 6.3 per cent, and that retail spending had also softened.
“It would have sent a confusing message if the RBA hiked today, given trimmed mean inflation met their June forecast and retail trade dipped ahead of today’s decision,” City Index Senior Market Analyst Matt Simpson said.
“And with US inflation measures pointing lower, it provides another month for homeowners to enjoy the current rate … of course, the pressure for the RBA to hike once or twice more remain in play.”
Oxford Economics Head of Macroeconomic Forecasting Sean Langcake echoed Mr Simpson’s cautionary outlook.
“Risks and uncertainties around inflation abound … while i declining, it remains uncomfortably high and there is more upward pressure to come through from strengthening wage growth,” he said.
“However, inflation surprised to the downside in Q2 and was below the RBA’s May forecasts. This was always going to make the case for an August rate hike difficult to prosecute.”
While the reprieve will be widely welcomed, analysts from Morgan Stanley, Citigroup and UBS all agree there’ll likely be further rate hikes ahead – though Mr Langcake believes we’ve hit the peak of the cash rate cycle.
Biggest Aus macro event of the week
The move was hotly anticipated by the market on all sides, with traders betting on Monday there was only an 8 per cent chance of a hike, while economists and investment bank analysts alike were split on what the bank would do.
Right before the decision, that number had risen to 14 per cent.
Australian Treasurer Jim Chalmers noted this morning that Australian inflation remains a problem, but added the RBA will likely be observing ongoing moderation in the data. On the whole, Australia does appear to be tracking US inflation downward.
“We are making welcome progress in the fight against inflation, but we’re not there yet,” Mr Chalmers said.
“We had a soft retail trade figure last week … [the RBA] will weigh that all up in the usual way and they’ll come to a decision whether rates go up or not.”
The RBA has evidently decided that those weaker figures are enough to warrant the second pause in a row.
Not out of the woods yet
However, some analysts have noted that as rates take roughly 12 months hit the economy, pausing could just end up prolonging inflation.
Consider also that Brent Crude prices have returned to US$85/bbl, and higher Brent means higher fuel costs, and it’s well established that energy inflation drags up national inflation.
This rate hike cycle was permeated by a divide in sentiment not as strongly felt ahead of other decisions. For all intents and purposes, there were about as many experts expecting a pause as there were expecting a hike.
Citigroup analysts expected another 25bps hike last week but noted that inflation data made it unsure given the rate beat the RBA’s own expectations by 0.3 per cent at a hard six per cent.
Morgan Stanley analysts saw a pause, confident that Q2 data would force the RBA to slow things down. Analysts for Morgan Stanley did note that sticky inflation remains the quo in services: rents, wages, and electricity.
One thing that all investment bank analysts agreed on: the RBA is unlikely to cut rates any time soon, and there’s a good chance further hikes will come.