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RBA Pauses the Official Interest Rate at 3.6% But Says That More Increases May Be Necessary

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The Central Bank says it will assess the strength of the economy and the prospects before increasing borrowing rates further, so the cash rate is on hold.

For the first time in 11 meetings, Australia’s Reserve Bank held its benchmark interest rate constant, signalling that it will wait to raise borrowing costs again as it assesses the effects of a historic run of hikes. Yet conceivable are more hikes.

The RBA maintained a target cash rate of 3.60% on Tuesday. Whether the central bank will halt for the first time since May or increase by another quarter point to 3.85% had split economists.

The governor of the RBA, Philip Lowe, stated in an accompanying statement, “The board believes that some additional adjustment of monetary policy may well be necessary to guarantee that inflation returns to goal.” “The Board now has more time to examine the status of the economy and the prospects, in a setting of substantial uncertainty, as a result of the decision to maintain interest rates constant this month.”

The RBA raised its official interest rates very late, initiating the process during the May 2018 federal election. The 350 basis point hike thus far represents the central bank’s fastest tightening in more than three decades.

After the RBA’s rate boost in March, Lowe suggested that a break in rate increases was approaching. Since then, a number of high-profile bank collapses or takeovers in the US and Switzerland have prompted investors and some economists to predict that little will change this month.

Others, however, have highlighted the robustness of the labour market among the reasons why greater tightening of monetary policy was required, with unemployment lingering near half-century lows at 3.5% and job openings twice the long-run average.

The RBA’s decision, according to finance minister Katy Gallagher, is “good news.”

We understand that cost-of-living challenges are still there for many Australians and businesses, Gallagher told reporters. We realise that inflation will stay higher [than we’d] want for longer than we’d like, which is why controlling inflation was a critical priority. I believe that today’s decision is a result of early indications that inflation has likely passed its peak and is starting to decrease.

The Australian dollar has decreased in value to 67.6 US cents as a result of the market reaction. Notwithstanding the disagreement among business economists, investors had anticipated the slowdown.

According to Lowe, the board understood that monetary policy had a lag and that “this large increase in interest rates” had not yet had its full impact.

The monthly consumer price index indicator and other data points “indicate that inflation has peaked in Australia,” according to Lowe. “Due to international circumstances and softening demand in Australia, goods price inflation is projected to reduce during the months ahead.”

The inflation rate in February was 6.8%, a decrease from the high of 8.4% in December. The March quarter CPI figures will be released by the Australian Bureau of Statistics on April 26, around one week before the RBA rates decision on May 2.

Even while the cost of electricity and other utilities is “increasing swiftly” and rent is rising at the quickest rate in “some years,” the RBA’s fundamental prediction is that inflation will fall this year and next, according to Lowe.

“It is crucial that this continues the case,” he added. “Medium-term inflation expectations remain firmly anchored.”

Industry associations praised the RBA’s rate reprieve as well.

According to Innes Willox, CEO of the national employer group Ai Group, “consumer prices and input costs are still running too high, but there are clear signals that the economy is weakening and that inflation has peaked.”

It makes perfect sense for the Reserve Bank to at least pause so it can assess if more rate rises will be necessary to ensure inflation is contained because the full effects of earlier rate increases have yet to be felt and more mortgagees are moving away from fixed home loan rates.

The Australian Chamber of Commerce and Industry’s David Alexander, a policy adviser, predicted that “small company owners today will be breathing a sigh of relief.”

For both consumers and small enterprises, the 10 straight rate hikes since May have been challenging, he added.

The comfort that borrowing costs would stabilise, at least temporarily, according to CoreLogic’s research director Tim Lawless, may encourage purchasers to enter the real estate market once more.

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