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Interest rates: Reserve Bank of Australia leaves official cash rate steady at 4.1%

Interest rates: Reserve Bank of Australia leaves official cash rate steady at 4.1%

Interest rates: Reserve Bank of Australia leaves official cash rate steady at 4.1%

Mortgage holders will be able to exhale in relief after the RBA decided to stop raising interest rates at the board meeting on Tuesday.

The Reserve Bank of Australia has granted Australian borrowers a reprieve after pausing its interest rate increases for just the second time in the past 14 meetings to give the central bank more time to evaluate the state of the economy.

On Tuesday, the RBA kept its benchmark cash rate at 4.1%, which is still the highest level in eleven years. About half of economists had predicted the pause and the other half had anticipated another 25 basis point increase in their predictions.

Before taking further action, the RBA governor, Philip Lowe, said the bank needed time to evaluate the effects of four percentage point rate hikes.

According to Lowe in a statement, "the higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will do so."

This, along with the haziness surrounding the economic outlook, led the board to decide to keep interest rates unchanged this month.

The minutes of the RBA's June board meeting fueled hopes that the central bank would postpone another rate hike. They claimed that last month's choice of raising the rate or keeping it the same had been "finely balanced."

Since then, the Australian Bureau of Statistics has made available data on the consumer price index for each month, revealing that headline inflation in May fell sharply to 5.6%, the lowest level in nearly a year. But underlying inflation only slightly decreased.

Since it started tightening monetary policy in May 2022, the RBA has raised the cash rate 12 times, excluding April and now July. Although most economists and markets anticipate the central bank to raise the rate by at least one more quarter point to 4.35% in the upcoming months before it peaks, Tuesday's pause may only be momentary.

On Tuesday, Lowe suggested that the central bank might still need to do more.

To ensure that inflation returns to target in a reasonable amount of time, he said, "some further tightening of monetary policy may be required, but that will depend on how the economy and inflation evolve." "The board remains steadfast in its determination to bring inflation back to target and will take whatever actions are necessary to do so."

In the wake of the decision, the Australian dollar declined against the US dollar on Tuesday afternoon, falling from 66.8 US cents to under 66.5 US cents. Investor bets that borrowing costs wouldn't rise as much as anticipated caused shares to increase by about 0.5%.

The strength of the economic data will determine whether the RBA resumes raising rates in August or decides to keep the pause in place. Prior to the RBA board meeting on August 1, important statistics to pay attention to include the June employment numbers on July 20 and the June quarter consumer price index figures on July 26.

Interest rates and consumer price index around the world

Interest rate
Annual CPI
New Zealand 5.5% 6.7% (March)
United States 5%-5.25% 4% (May)
United Kingdom 5% 8.7% (May) 
Canada 4.75% 3.4% (May)
Australia  4.1% 5.6% (May)
Eurozone 4% 5.5% (June)


According to Lowe, the central bank will also be keeping an eye on domestic spending patterns and developments in the global economy.

It's significant that he downplayed the risk of wage increases currently fueling inflation.

The RBA board will "continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms," he said, adding that "at the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up."

A recession may yet be avoided by the economy. According to Lowe, the board was "still expecting the economy to grow as inflation returns to the 2 to 3% target range, but the path to achieving this balance is a narrow one".

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