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The Reserve Bank of Australia (RBA) has confirmed it will hold the official cash rate at 4.10% today (1 August 2023) for the second consecutive month.
This is the first time the central bank has held the cash rate steady for two consecutive months in over a year (the last time being March-April 2022), and the third time the cash rate has been paused since May 2022.
A better-than-expected inflation rate over the June quarter, as well as slowing retail sales growth points to cooling economic conditions.
And while the unemployment rate is still at record low levels, the forward indicators of employment conditions all point to a much tighter jobs market going forward.
Subsiding momentum in inflation and consumer spending has “eased the pressure off” the RBA to continue lifting interest rates.
This allows more time to assess the economic outlook as it tries to engineer a soft landing whilst returning inflation to target.
The high level of inflation that has challenged the Australian economy and seen interest rates rise at the fastest pace in a generation, continued to moderate in the June quarter.
Though still high relative to history and well above the RBA’s 2%-3% target range, Consumer Price Index (CPI) inflation was below both market expectations and the RBA’s official forecasts and looks set to continue to moderate and move lower into the first half of 2024.
What was predicted?
Major bank economists were split down the middle when it came to forecasting the RBA’s decision today (1 August).
NAB and ANZ both predicted the RBA would decide on a pause this month.
However, NAB chief economist Alan Oster does expect a potential further cash rate hike in September or October to a peak of 4.35%.
ANZ economist Madeline Dunk noted the sharp fall in June retail sales supported the case for the central bank to maintain the cash rate, attributing the slowdown in spending to rising mortgage payments and cost-of-living pressures.
Meanwhile, Westpac and the Commonwealth Bank of Australia (CBA) believed the RBA would move to lift the cash rate once more to a peak of 4.35%.
Westpac chief economist Bill Evans stated the major bank has “consistently argued that a further increase in the cash rate should be the appropriate policy response at the August meeting”.
CBA economist Belinda Allen stated there was “enough evidence to suggest the path of least regret for the RBA is to lift the cash rate by 25 bps to 4.35% in August”.
“This should provide an offset to any lingering risks in the inflation and wages outlook. We expect this to be the last rate hike of this cycle and for the RBA to be on hold until 2024,” Ms Allen said.
New governor, new dates
The August rate decision is the second-to-last cash rate decision to be announced before RBA governor Philip Lowe steps down from his position.
He is set to finish his seven-year tenure as governor on 17 September 2023.
Prime Minister Anthony Albanese and Treasurer Jim Chalmers confirmed earlier this month that Michele Bullock would become the next governor of the RBA, and the first female governor of the central bank.
Ms Bullock will begin her new role as governor on 18 September and run for a seven-year term.
The RBA is also set to undergo a shakeup once the new governor takes charge, including by reducing the number of meeting it has in 2024.
From next year, the board will meet eight times a year instead of 11 times. The meeting dates will be as follows:
- 5–6 February
- 18–19 March
- 6–7 May
- 17–18 June
- 5–6 August
- 23–24 September
- 4–5 November
