The Reserve Bank of Australia Hits Pause After Nearly One Year of Hikes

RBA Hold

The Reserve Bank of Australia decided today to leave rates unchanged at 3.6% and the highest in thirteen years, in order to have "additional time to assess" the impact of the tightening so far and the economic outlook ^[1]. The move pauses an 11-month long rate hike cycle that produced 350 basis points worth of hikes, over ten straight meetings.

The outcome was not a surprise since the central bank had already softened its language in the last policy meeting and the accounts of that decision had revealed that policymakers had agreed to reconsider the case for a hold this time around ^[2].

The move comes after the recent banking turmoil, sparked by the collapse of the Silicon Valley Bank in the US, which pushed the Fed into a more conservative policy stance last month. Although the RBA alluded to an "environment of considerable uncertainty", it stressed that the Australian banking system "strong, well capitalised and highly liquid".

Peak Inflation

The latest quarterly data had shown that CPI Inflation accelerated 7.8% y/y in Q4, marking the biggest increase since 1990. However, the monthly figures have been easing recently, moving to 6.8% y/y in February. The Reserve Bank of Australia believes that indicators such as the monthly CPI, suggest that inflation "has peaked", expecting a decline this year and the next.

This allowed officials to hold rates, along with the fact that growth "has slowed". The Australian economy expanded by 0.5% q/q in the fourth quarter, which marked the slowest growth since Q1 2020.

Room for More Tightening

The RBA appears optimistic about inflation, but we have seen many countries struggling to bring it down and it is definitely still very high. GDP growth meanwhile may have slowed, but the Australian economy has shown significant resiliency. Furthermore, the labour market remains "very tight", with unemployment close to its fifty years lows and wage growth "continuing to in increase".

Given the above, the terminal rate may have not been yet been reached and in spite of the pause, policymakers definitely did not make any such claim. In fact, they kept the door open to more tightening, retreating their determination to bring inflation back to target and do what is necessary to accomplish that.

In particular, the Board expects that "some further tightening" of monetary policy "may well be needed" in order to make sure that inflation returns to the 2%-3% target. The new wording is softer than the "further tightening of monetary policy will be needed" reference of the previous statement ^[3], but leaves all options on the table.

AUD/USD Reaction

The Aussie rallied on Monday, as commodity currencies benefited from the boom in oil prices, after the surprise production cuts announced by OPEC+ members. However, AUD/USD slides today, as it reacted negatively to the RBA's decision to keep rates unchanged.