A surge of relief has washed over borrowers, renters and businesses as the Reserve Bank holds interest rates steady for the third consecutive month, a parting gift from the exiting RBA Governor, Philip Lowe. His tenure, lasting 43 years, is soon to end, and with his departure, he leaves behind the promise of a soft economic landing.
The cash rate remains at 4.10 per cent, where it has stood since June – a tactical hold as the RBA evaluates whether previous rate hikes have begun to curtail inflation back towards the 2 to 3 per cent target band. A more sustainable balance between supply and demand in the economy is being established, indicated Dr Lowe.
While warning that inflation continues to tread too high, lingering there for some time yet, Dr Lowe also suggested that the effects of prior interest hikes are taking hold. “The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon…”, he commented. He further explained how this, in turn, stabilises both output and employment.
Despite the cautious optimism, Dr Lowe also warned of persistently underlying inflation. He alluded to significant uncertainties, such as high services inflation and diminished consumption demand that may tip the balance of Australia’s economic prospects.
The looming question then becomes if additional tightening of monetary policy will become necessary to bring inflation under control in the future. It will continue to depend upon the data and the evolving assessment of economic risks, added Dr Lowe.
Economists, in the wake of the governor’s remarks, have suggested that barring an unexpected inflation breakout, interests rates are likely to stay put in the coming months. Conversely, the debate is now steering more towards when the Reserve Bank might consider cutting rates rather than raising them again.
Treasurer Jim Chalmer shared his sentiments on the topic, terming the RBA’s decision as a third moment of relief for Australians and small businesses. He acknowledged the ongoing financial pressures despite the decision, elaborating Australia’s plans to roll out billions of dollars as relief aid to counter inflation.
Interestingly, the RBA’s decision aligned with consensus forecasts. Ahead of the meeting, the market and major banks predicted that the cash rate would remain steady. Financial analysts from Commonwealth Bank, ANZ and Westpac now forecast an extended pause from the central bank, predicting that the next strategy would be to cut rates.
Under the stewardship of Dr Lowe, the RBA successfully rolled out its strategy of the most aggressive monetary tightening cycle since the 1980s, acting as an effective leash on the economy. Latest figures confirm this trend, with inflation easing to 4.9 per cent in July, down from 5.4 per cent in June.
However, the side effects of this aggressive tightening have had a visible impact. Australian mortgagors have been hit severely by the rapid increase of interest rates. Households with an average mortgage size of $585,000 are now paying $1415 more every month than before the tightening process began. The borrowing capacity of households has also seen a significant decline.
Dr Lowe has had a commendable run, praised for his adept handling of monetary policy through the turmoil of the COVID-19 pandemic. As his era comes to a close, the reins pass to his successor, Deputy governor Michele Bullock, come September 18.