‘Welcome reprieve’ with rate hold but further hikes likely
The Reserve Bank of Australia (RBA) has made its second consecutive call to hold interest rates at 4.1 per cent in what markets have interpreted as a sign of an approaching end of the long hiking cycle.
Rates were held at 4.1 per cent yesterday in the penultimate monetary policy decision by governor Phil Lowe.
Earlier this month, CPI inflation for the June 2023 quarter marked its lowest quarterly rise since September 2021. It rose by 0.8 per cent and by 6 per cent annually, according to the Australian Bureau of Statistics.
Treasurer Jim Chalmers said the rate hold will be a “welcome reprieve” for Australians who are already doing it tough.
Vanguard’s senior economist, Alexis Gray, observes the RBA appears confident that it is no longer behind the curve in managing inflation.
“Until recently the RBA had been very clear that interest rates were only heading in one direction: up. They are now taking a data-dependent approach to policy, with cash rate decisions based on the behaviour of inflation and its key drivers,” Gray said.
However, she expects the RBA to have at least two more rate rises to bring rates to 4.6 per cent by the end of the year.
“We still expect the RBA to lift the cash rate two more times to 4.6 per cent by the end of the year, although we acknowledge the risk that interest rates peak at a lower level.”
This is echoed by Russel Chesler, head of investments and capital markets at VanEck, who agrees there could be yet two more hikes.
“We are now nearing the end of the hiking cycle, but consumers have no cause to cheer yet. We believe the central bank will need to hike one to two more times to reign in lingering inflation and wages risk,” Chesler said.
Emma Lawson, fixed interest strategist - macroeconomics at Janus Henderson Australia, said she expects to see one more hike to bring rates to 4.35 per cent which could possibly occur in September.
“The longer the RBA leaves it, the worse the coincident economic data appears and the harder it is for them to raise rates to tackle inflation.”
T. Rowe Price portfolio manager, Scott Solomon, referenced actions taken by the European Central Bank and Federal Reserve overseas.
“With the US Federal Reserve and the European Central Bank hinting at potential upcoming pauses, it does relieve some pressure that the RBA will fall further behind. Lowe takes pride in the fact Australia reached full employment and it’s unlikely he wants to risk disturbing that as long as inflation is moving in the right direction.”
According to Solomon, with deputy RBA governor Michele Bullock taking over the governor role from Philip Lowe in September, T. Rowe does not expect significant policy changes but is hoping for improved communication.
“While Lowe received outsized blame for the current economic conditions, his communications were sometimes puzzling and inconsistent. The initial step taken to reduce the sheer frequency of RBA meetings should help on that front,” he explained.
AUTHOR
Rhea Nath
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