Pause in Rate Hikes! RBA Announces Pause in Rate Hikes, Cash Rate Held Steady at 4.1%

Reserve Bank of Australia Announces Unchanged Official Cash Rate, to be Maintained at Least Until Next Month’s Meeting. Market and economists view it as a well-balanced decision.

Reserve Bank of Australia (RBA) has decided to keep the cash rate unchanged at 4.1% this week but has issued a warning about the potential need for further rate hikes. RBA Governor Philip Lowe stated that maintaining the current rate provides time to assess the impact of recent rate increases on the economy and its outlook. Despite being at the highest level since April 2012, the central bank has chosen to keep rates steady this month due to the uncertainties surrounding the economic outlook.

Although the decision was made to pause rate hikes at this meeting, Lowe indicated that there may be a need for further rate increases in the coming months to bring the current inflation rate down to the RBA’s target range of 2% to 3%. To ensure inflation returns to the target level within a reasonable timeframe, additional monetary policy tightening may be necessary, subject to the developments in the economy and inflation.

In the past 14 meetings, the Reserve Bank of Australia (RBA) has raised rates 12 times, making this meeting the second pause in the series of rate hikes, which was not the expected outcome in the market. Some economists predicted a continuation of rate hikes at this meeting, but a survey conducted by the Australian Financial Review revealed that two-thirds of economists surveyed expected a rate increase.

The expectation of a pause in rate hikes increased after the release of the latest monthly Consumer Price Index (CPI) data. The CPI for May showed a decrease in overall inflation from 6.8% in April to 5.6%.

Supporters of the pause in rate hikes argue that there is evidence of a slowdown in Australian economic growth. In the first quarter of this year, the Australian economy grew by only 0.2%. However, not all economists believe that maintaining the current interest rate is wise. Excluding volatile items such as gasoline and holiday travel, the core inflation rate for May slipped only slightly from 6.5% in April to 6.4%, indicating that broader price pressures still persist.

Supporters of rate hikes point out that the released employment data exceeded expectations. The data shows that the unemployment rate dropped to 3.6% in May, with 75,900 people finding jobs.

Lowe stated that the RBA committee will continue to monitor the risk of high inflation leading to significant price and wage increases. If high inflation expectations become entrenched, this scenario may occur. Therefore, the central bank will closely monitor the evolution of labor costs and pricing behavior by businesses. This aligns with the views of Deputy Governor of the Reserve Bank of Australia, Michele Bullock. Last month, Bullock warned that if wage demands and price increases become linked to past inflation rates, high inflation could become self-sustaining. The current wage growth rate is in line with the inflation target set by the central bank.

The central bank predicts that productivity needs to grow at a rate of around 1% per year to achieve the low inflation target. However, productivity has declined by 4.5% in the past 12 months and has not grown at all in the past three years. This has resulted in a 7.9% increase in unit labor costs (the difference between wages and productivity) in the past 12 months, significantly higher than the 3% upper limit mentioned by Lowe, which is necessary to achieve the inflation target.

According to data released by the Department of Workplace Relations and Employment, wage increases for workers covered by enterprise bargaining agreements in the first quarter of this year reached the highest growth rate in 11 years.

Over the past year, the rapid increase in interest rates has had the greatest impact on 3.2 million households with loans, with some families seeing their monthly repayments increase by over $1,000.

According to data from RateCity, the current cash rate stands at 4.1%. For a family with a $500,000 loan, the monthly repayment has increased by $1,134 compared to May 2022, representing a 49% increase. For a family with a $750,000 loan, the figure is $1,701. And for a borrower with a $1 million loan, the additional monthly payment amounts to $2,269.

Higher interest rates have also resulted in a sharp decrease in the amount of home loan funds available to households. Data from comparison website Compare the Market shows that since May 2022, the borrowing capacity for a family with an annual income of $150,000 and two children has declined by 28% to $623,400. A single individual with an annual income of $75,000 can now borrow a maximum of $366,900, down from the previous $511,100.

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