Lowe makes second-last call to hold rates

Yasmine Raso

Senior Journalist, Financial Newswire

1 August 2023

Further reprieve is in store for mortgage holders and those grappling with rising cost-of-living after the Reserve Bank of Australia (RBA) Board announced today it would be holding the official cash rate at its current 4.10 per cent, in what was RBA Governor Philip Lowe’s second-last interest rate decision before his term ends on 17 September.

The decision comes after the latest monthly Consumer Price Index (CPI) figures for June indicated inflation had declined to 5.4 per cent, while the annual change to June 2023 had to declined to six per cent, which was “still too high” according to Lowe.

“Interest rates have been increased by 4 percentage points since May last year,” the announcement said.

“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month.

“This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook. Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated.

“The central forecast is for CPI inflation to continue to decline, to be around 3¼ per cent by the end of 2024 and to be back within the 2–3 per cent target range in late 2025.”

The Board’s statement reiterated its top priority was to return inflation to this target, with medium-term expectations remaining consistent with the target. However, the Board is also expecting the economy and employment to “grow below trend” despite an easing labour market and wages growth, with the unemployment rate forecast to increase to 4.5 per cent by late next year from its current 3.5 per cent.

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. There are though significant uncertainties,” Lowe said in the statement.

“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.”

The Board also acknowledged while some households are experiencing a “painful squeeze on their finances” due to rising cost of living expenses and 400 basis points in loan interest increases, others are benefitting from rising house prices, large savings buffers after the COVID-19 pandemic and higher interest income. Lowe said this may lead the Board to consider further rate hikes.

“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates,” he said.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks.”