The Reserve Bank of Australia Paused Again but Kept the Door Open to More Hikes

Rate Pause

The Reserve Bank of Australia had held rates steady in April, after ten consecutive rate increases. Policymakers did not stay in the sidelines long though, since they subsequently delivered two back-to-back hikes, which brought the official cash rate at 4.1% and the highest in level in eleven years.

The central bank hit the pause button again on Tuesday, in order to "assess" the economic outlook and the cumulative impact of its monetary tightening ^[1], which amounts to 400 points since the May 2022 lift-off. The decision was not exactly a surprise, but there was quite some uncertainty going into the meeting, given the start-stop backdrop.

High Inflation

The latest monthly data from last week, revealed a significant deceleration in the Consumer Price Index (CPI), which allowed officials to stay in the sidelines on Tuesday. Headline inflation came in at 5.6%% y/y in May, in what was the smallest rise in more than a year.

The central bank assumes that inflation "has passed its peak", having moderated to 7% y/y in the first quarter. However, it is "still too high" and far from the 2-3% target. More to it, policymakers believe it will remain elevated for "some time yet" and don't' expect it to hit the top of that range before mid-2025, according to May's projections. ^[2]

Tight Labor Market

The Australian economy added 75,900 jobs in May, in what was the biggest increase in over a year. Unemployment ticked down to 3.6% and close to its five decades lows and the RBA still views the labor market as "very tight", despite acknowledging loosening conditions.

Furthermore, wage growth continues to pick up, as the Wage Price Index rose to 3.7% y/y in the first quarter and the highest in around eleven years, while the minimum wage in Australia rose by 5.75% from this month. ^[3]

Door Open to More Hikes

The economy meanwhile "has slowed", as the 2.7% y/y GDP expansion in Q4 was the smallest in nearly two years and the central bank expects "below trend growth", having lowered its 2023 projections ^[2]. This slowdown, along with the recent inflation moderation and the easing in labor conditions policy, led policymakers to Tuesday's hold.

However, inflation remains high and far from target, while the labor market is still tight, with elevated wages and historically low unemployment. These factors keep pressure for sustained restrictive stance and show that the RBA may have more work to do.

Policymakers kept more policy firming in play, reiterating that "some further tightening" in monetary policy may be need to bring inflation back to the 2-3% target in "a reasonable timeframe". Even though they kept the door open to more hikes and maintained a hawkish bias, the forward guidance was not particularly forceful and sustains the uncertainty around the monetary policy outlook.

Market Reaction

The Australian stock market rose after the decision. AUD/USD reacted lower, but quickly covered most of the losses, highlighting the uncertainty around the next steps.

Messy Central Banking

As I have been writing for a while now, global monetary policy has been a messy affair this year, as major central banks appear to be all over the place recently, making harder to assess the next steps. The RBA is one of the best examples, since it paused its tightening cycle, restarted it and then paused again – all within just four months.

It is hardly the only one though, since the US Fed decided to leave rates unchanged in June after ten consecutive increases, but its updated projections imply an additional 50 basis points worth of hikes ^[4]. The Bank of England appeared to have been tightening reluctantly over recent months, but was forced to reaccelerate the pace with an 0.5% rate rise in June, after another hot inflation report. ^[5]

The Bank of Canada, which was the first major central bank to stay in the sidelines this year, was forced to restart tightening last month, after an uptick in inflation ^[6]. The Reserve Bank of New Zealand, which is at the forefront of monetary tightening, increased rates to 5.5% but its updated forecasts suggest that the terminal level has been reached. ^[7]

The Bank of Japan meanwhile, is at the other end of the policy spectrum, with negative rates and yield curve control, having shown no real inclination to abandon its ultra-loose stance any time soon.