Reserve Bank of Australia Governor Phillip Lowe said in a statement earlier today that the decision to maintain rates at 4.10% this month would provide the RBA with more time to assess the strength of the economy and the impact of interest rate increases on the economy.
Ahead of the RBA decision, the markets were split close to 50/50 as to whether the RBA would raise rates by 0.25% for a third consecutive time or take a pause. There were strong reasons for either move. Employment and retail sales remain strong and are proof that the economy can withstand further rate increases. Also, inflation is running at 5.6%, well above the RBA's 2% target. On the other hand, GDP growth has cooled, households have been hit hard by higher mortgage rates, and there are concerns that further rate hikes will tip the economy into a recession.
In the end, RBA policymakers decided to maintain rates, but the move was a “hawkish pause,” with the RBA statement noting that inflation is still too high and will remain so for some time. The RBA said that further tightening could be required to bring inflation to target, a clear message that this pause is likely temporary and should not be viewed as the end of the current tightening cycle.
Where does the RBA go from here? Tuesday’s rate statement noted that inflation has “passed its peak" while at the same time warning that inflation risks have shifted to the upside. In other words, inflation is on its way down, but the battle is not over yet. RBA Governor Lowe has stressed on previous occasions that rate decisions will be based on the economic data, which means employment, GDP, and inflation data will be key factors in the August 1st rate decision.
In the Forex market, the Australian Dollar’s reaction has been muted.
The Australian Dollar against the US Dollar dropped 40 pips after the RBA decision but recovered these losses and gained 20 pips on the day. The Australian dollar is showing little movement against the other major currencies.
Equity markets are cheering the RBA pause, and the S&P ASX 200 stock market index initially fell but has rebounded and is up 0.45, closing at 7279.00.