The Reserve Bank of Australia (RBA) has again elected to keep interest rates on hold at its August board meeting, with the cash rate remaining at 4.1 per cent. This is only the third time that the central bank has held steady since it kicked off its monetary tightening cycle in May last year, with previous pauses in April and July this year.
The RBA’s latest rate call follows last week’s inflation figures, which came in softer than anticipated. The Consumer Price Index (CPI) lifted 0.8 per cent during the June quarter, down from 1.4 per cent in the March quarter and resulting in an annual increase of 6.0 per cent.
Meanwhile, the latest labour force data for the month of June again demonstrated that the labour market remains tight, with the unemployment rate sitting at 3.5 per cent.
Surveys by Bloomberg and Refinitiv leading up to the August meeting indicated that a majority of economists still expected the RBA to hike for the 13th time this cycle.
In contrast, market expectations for another rate hike diminished in light of both the recent inflation data as well weaker than expected retail sales during the month of June.
Among those economists who had pencilled in a pause was NAB’s Tapas Strickland, in what he said would be a “close decision” with the RBA retaining a tightening bias.
“Since the last meeting, Q2 CPI came in slightly below the RBA’s prior May SoMP forecasts (trimmed mean 5.9 per cent vs. May SoMP forecast 6.0 per cent), retail sales for June were soft – reversing the strength in May, and the unemployment rate fell back to 3.5 per cent,” he said.
“We think the RBA will be able to forecast inflation returning to 3 per cent by mid-2025 (its own benchmark), and the forecast horizon itself will extend to end 2025.
“Note the RBA’s forecasts will be conditioned on a hybrid market path which will likely incorporate one further rate hike. Given indications of a softer consumer, we think the RBA will likely have to be pulled by the inflation data to hike again.”
Economists at ANZ had also predicted the RBA would remain on hold in August, building on their forecast for an “extended pause” outlined in mid-July.
“Inflation is coming off faster than the RBA expected, there are clear signs the household sector is cutting back and the global backdrop has improved recently,” they said.
“The labour market is still tight, but we think the RBA would see the combination of moderating inflation and a low unemployment rate as positive.”
While noticing that the August meeting would be a “very close call”, AMP chief economist Shane Oliver was also of the view that the RBA would keep the cash rate on hold.
“The RBA is now getting what it wanted on inflation and the ongoing weakness in real retail sales highlights the high and increasing risk that it will knock the economy unnecessarily into recession if it keeps tightening,” he said.
Outgoing RBA governor Philip Lowe will oversee one final rate decision by the central bank on 5 September before he is replaced by Michele Bullock on 18 September.
