‘Prudent’ pause does not point to hiking halt: Lowe

The Reserve Bank of Australia (RBA) remains open to further rate tightening amid speculation of an end to the cycle.

In an address to the National Press Club, RBA governor Philip Lowe explained the monetary policy board’s rationale for a halt to the rate hiking cycle following their latest meeting on 4 April.

He said the decision to hold the cash rate at 3.6 per cent reflected mounting evidence of a slowdown in aggregate demand in the economy, as reflected by the latest consumer price index (CPI) and the dip in retail spending.

However, Lowe said the central bank’s tightening may not be over, with the RBA having to assess upcoming quarterly inflation figures, consumer spending data, and labour market trends before determining its next cash rate move.

“The decision to hold rates steady this month does not imply that interest rate increases are over,” he said last week.

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“Indeed, the board expects that some further tightening of monetary policy may well be needed to return inflation to target within a reasonable time frame.”

But the April pause was “prudent”, allowing more time to assess the impact of 10 consecutive hikes to the cash rate since May 2022, totalling a cumulative 3.5 per cent.

Governor Lowe’s remarks come amid growing expectations of a permanent end to the hiking cycle, with senior economists, including CBA’s head of economics, Gareth Aird, and HSBC Australia chief economist, Paul Bloxham, claiming the cash rate may have hit its peak at 3.6 per cent.

Other analysts, however, continue to anticipate at least one additional hike over the coming months.
Deutsche Bank economist Phil O’Donoghue said the pause has not prompted a revision to his forecast of a 4.1 per cent terminal rate.

But he acknowledged quarterly inflation data may shift expectations.

“An on-hold decision in line with our expectations, but also nothing to shift us from our view that this will ultimately prove to be a pause,” he said.

“Our terminal rate remains at 4.1 per cent. We have held that view since 30 January. Risks around our view hinge primarily on the evolution of inflation. Specifically: Q1 CPI, due on 26 April, could make or break the case for a May hike.”

Rate cut nowhere in sight
During his address in Sydney, Lowe said the central bank did not envisage a shift to an easing bias any time soon.

“I do think it’s premature to be talking about interest rate cuts,” he said.

“Remember, we’ve got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range.

“So, I think it’s too early — way too early — to be talking about interest rate cuts and the balance of risk lie to further rate rises, but it will depend upon the data.”

The governor went on to note the central bank was prepared to keep interest rates higher for longer.

“If we need to keep interest rates higher for longer to make sure that inflation comes back to 2 to 3 per cent range [in a] reasonable time, we’ll do that,” he said.

“But that will be determined by the flow of events.”