Hold everything: ‘Sigh of relief’ as RBA holds fire on interest rate increases

The Reserve Bank has kept interest rates on hold for the second consecutive month and economists were now tipping that the painful rise in mortgages since May last year could be finished.

John McCarthy

Aug 01, 2023, updated Aug 01, 2023

Treasurer Jim Chalmers meets with Reserve Bank of Australia Governor Dr Philip Lowe and other financial regulators at Parliament House . (AAP Image/Mick Tsikas)

But the RBA wasn’t so sure and suggested there may be further moves. In its announcement, RBA governor Philip Lowe said further tightening may be required to ensure that inflation returned to its target in a reasonable timeframe.

However, that would be dependent on how the economy performs as an expected 150,000 mortgage holders shift over the next three months from fixed rates that were negotiated at historically low levels.

Lowe said there was still too much uncertainty about how inflation would play out, particularly in the services sector, but also in the lagging effect of previous interest rate hikes which take several months to flow through the economy.

The decision to stall another hike would allow the RBA to further assess the impacts of previous increases, Lowe said.

Treasurer Jim Chalmers said the decision was a welcome reprieve.

“There will be a sigh of relief around Australia,” he told Parliament.

Economist Chris Richardson said it was the last rate rise in this cycle.

“Official interest rates in Australia have now peaked. That also means the RBA is happy to double down on what has, to date, been a successful gamble,” he said.

“They’ve raised rates less than many other central banks, hoping for a soft landing. Recent data around the world (but especially in both the US and Australia) suggests they’re still on the right side of that bet.”

The ANZ said there would be a prolonged pause in hikes.

The ASX jumped about 30 points on the news while the Australian dollar fell.

While the decision was likely to be welcomed by many, the RBA said inflation was still too high at 6 per cent.

“The Australian economy is experiencing a period of below-trend growth and this is expected to continue for a while,” Lowe said.

“Household consumption growth is weak as is dwelling investment. The central forecast is for GDP growth of around 1.75 per cent over 2024 and a little above 2 per cent over the following year.

“The recent data are consistent with inflation returning to 2 to 3 per cent target range over the forecast horizon and with output and employment continuing to grow.”

Deloitte Access Economics partner Stephen Smith said it was the right call by the RBA to hold rates at 4.1 per cent.

“Australia is not yet out of the woods in terms of the fight against excessive inflation. However, the appropriate policy response requires more nuance than a narrow, simplistic assertion of the relationship between unemployment and inflation,” Smith said.

“As is widely accepted, the cost of residential rent and utilities will be a key source of inflation over the next 12 to 18 months. Importantly, these cost pressures have arisen as a result of supply pressures, not excessive demand.

“As a result, higher interest rates – which work to dampen demand in the Australian economy – are ineffective at combating this type of inflation. In fact, they are likely to make the situation worse by delaying a recovery in dwelling construction.

“There is still work to be done to combat inflation, but that can no longer be achieved through higher interest rates. Supply side inflation needs to be tackled through fiscal policy, investment and innovation to lift productivity; competition policy to improve efficiency; and tax policy to boost prosperity.”