The Reserve Bank of Australia has become the first major central bank to pause its campaign of rate increases, even though inflation remains very high.
The decision comes ahead of a meeting across the Tasman where the Reserve Bank of NZ is forecast to raise its official cash rate by 0.25% later today.
That would take the NZ cash rate to 5%, despite the economy contracting by 0.7% in the final quarter of 2022 and a weak start to the year.
In contrast, the RBA’s pause decision yesterday left the cash rate at 3.6% after 10 rate rises in less than a year.
The pause decision became a big tip over the weekend and again on Monday ahead of the meeting but major bank economists were split on whether there would be an increase or not.
The post-meeting statement explained the pause as the bank wanting time for the lags in monetary policy changes to catch up.
“The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty.
“The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt.
“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook,” Governor Philip Lowe said in the statement.
But Dr Lowe made it clear the central bank still saw a need for possible future rate rises, saying “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”
The statement made it clear the RBA board, or at least some of its members, remain worried about rising wages – with the board dominated by senior business executives, what would you expect.
“Wages growth is continuing to increase in response to the tight labour market and higher inflation. At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up,” the statement said.
“The Board remains alert to the risk of a prices-wages spiral, given the limited spare capacity in the economy and the historically low rate of unemployment. Accordingly, it will continue to pay close attention to both the evolution of labour costs and the price-setting behaviour of firms.”
But the reality remains that real wages are falling – the Wage Price Index was weaker than forecast in the December quarter and settlements since then have not been reported as being out of whack with rises considerably less than the 6% to 7% growth in inflation.
There’s a National Wage decision coming in the next six months which could see wage rises around 4% to 5% – still less than forecast inflation.
The labour market’s strength obviously remains a worry for the RBA and it wants to see a rise in the jobless rate from the current 3.6% to back over 4%.
That’s a level which used to worry the RBA before the pandemic as it was supposed to be close to the level that might trigger a burst of inflation. That bit of nonsense is still around among policymakers and business leaders. job vacancies remain high – there are just 1.16 unemployed person for every vacancy.
The Australian Bureau of Statistics says the biggest growth in job vacancies remains among the lowest paid sectors of arts and recreation, accommodation and food services. The ABS says vacancies are currently higher in these sectors than they were before the pandemic.
Looking overseas, and Dr Lowe said the outlook for the global economy looked “very subdued with below-average growth expected this year and next.”
“Global inflation remains very high. In headline terms it is moderating, although services price inflation remains high in many economies.”
“The recent banking system problems in the United States and Switzerland have resulted in volatility in financial markets and a reassessment of the outlook for global interest rates.
“These problems are also expected to lead to tighter financial conditions, which would be an additional headwind for the global economy.”
But it’s a different story in Australia, with Dr Lowe saying, “The Australian banking system is strong, well-capitalised and highly liquid. It is well placed to provide the credit that the economy needs.”
“A range of information, including the monthly CPI indicator, suggests that inflation has peaked in Australia. Goods price inflation is expected to moderate over the months ahead due to global developments and softer demand in Australia.
“Meanwhile, rents are increasing at the fastest rate in some years, with vacancy rates low in many parts of the country. The prices of utilities are also rising quickly. The central forecast is for inflation to decline this year and next, to around 3 per cent in mid-2025. Medium-term inflation expectations remain well anchored, and it is important that this remains the case.
“Growth in the Australian economy has slowed, with growth over the next couple of years expected to be below trend. There is further evidence that the combination of higher interest rates, cost-of-living pressures and a decline in housing prices is leading to a substantial slowing in household spending.
“While some households have substantial savings buffers, others are experiencing a painful squeeze on their finances.”
