Reserve Bank of Australia holds cash rate steady amid global uncertainty

RBA paused interest rate rises

The Reserve Bank of Australia held the cash rate steady at 3.6% during its April meeting. This is the first pause in the central bank’s hiking cycle after 10 consecutive interest rate rises since May 2022.

The move follows a recent slowdown in monthly inflation and household spending. According to RBA Governor Philip Lowe, the bank is still prepared to increase borrowing costs to ensure inflation returns to its target if necessary.

AUDUSD fell to 0.6755 following the announcement, while the yield on three-year bonds also decreased. In contrast, stocks rebounded and rose by 0.1% after the pause.

RBA has confidence in Australian banking system amidst global instability

The outcome affirms the Reserve Bank of Australia's position as an exception in the international arena. Despite having raised rates by 3.5 percentage points since May 2022, the RBA has been more cautious than other central banks such as the Federal Reserve and the European Central Bank.

The Fed and ECB proceeded with tightening measures in the previous month, despite market instability caused by bank collapses and government interventions.

RBA Governor Philip Lowe acknowledged that these difficulties could lead to more restrictive financial conditions and further strain the global economy. However, he expressed confidence in the strength, capitalization and liquidity of the Australian banking system, which could provide the necessary credit to boost domestic economy.

Lowe has consistently emphasized the state of Australian household finances as a significant uncertainty. The rate hikes and elevated inflation are causing in a significant drop in household spending, with some households having substantial savings buffers while others are facing a painful squeeze on their finances.

Inflation still a concern but Australia could avoid recession

Lowe’s actions have supported economists’ belief that Australia could avoid a recession, despite it being difficult.

The governor can count on a housing market that shows early signs of a recovery, which could lead to an orderly correction.

Recent monthly inflation reports also suggest that the RBA’s expectations of a peak in prices in the fourth quarter were accurate, while the tight labor market and unemployment near a 50-year low show signs of easing.

Inflationary pressure remains a concern, with readings higher than in the US and Canada, and Deutsche Bank and Goldman Sachs predict another two quarter-point hikes with a terminal cash rate of 4.1%.

“The board remains alert to the risk of a prices-wages spiral,” Lowe said, noting that wage growth is still consistent with the inflation target, as long as productivity growth picks up.

New statement a subtle shift in RBA’s monetary policy

The RBA's latest statement signals a subtle shift towards a more dovish approach. While a rate hike is still possible in May, the statement now states that "further tightening of monetary policy may well be needed" instead of the more assertive "will be needed."

In addition, the statement now indicates a higher level of confidence in the easing of price pressure in Australia. The RBA's recognition of a substantially slowing in household spending due to a combination of factors, including higher interest rates and cost-of-living pressures, is another new dovish addition.

RBA Governor Philip Lowe is scheduled to speak on Wednesday at the National Press Club, in a speech titled "Monetary Policy, Demand and Supply". The speech is expected to provide additional insight into the central bank's view of the current economic situation and its interest rate intentions.