RBA halts rate hikes, but Middle East conflict still clouds outlook
Australia's Reserve Bank held its cash rate at 4.35%, ending three consecutive increases, but warned inflation remains too high and further tightening is not ruled out.
The Reserve Bank of Australia (RBA) on Tuesday decided to hold its cash rate at 4.35%, putting an end to a run of three consecutive interest rate increases. RBA Governor Michele Bullock acknowledged that higher borrowing costs have been "tough" on households, but stressed that inflation remains too high and the battle against it is not over.
"I want to be very clear that inflation remains too high," Bullock said. "Today's decision does not rule out further tightening in monetary policy if that is what is required to bring inflation down."
Despite the tough talk, financial markets are not convinced the RBA will need to raise rates again, putting the probability of a hike by year's end at a little over 50%. Economists are roughly split on whether rates will need to rise further.
The economy slowed markedly at the start of the year, and interest rates are contributing to that slowdown. Unemployment has jumped to 4.5% – its highest since late 2021 – and is set to push a bit higher. Consumer confidence is at around its lowest levels on record, as pessimistic as during the height of the pandemic.
Rising unemployment and slowing growth suggest lower interest rates, or at least no more hikes. Inflation at 4.2%, however, argues the opposite – hence the difficult terrain the RBA is trying to navigate.
Geopolitics also plays a role. Global oil prices have retreated to three-month lows of about $US83 a barrel after news of a peace deal between the US and Iran. Bullock "welcomed" reports of an agreement but cautioned that "it will take time for shipping companies to regain the confidence to start travelling through the Strait of Hormuz." Insurance costs will be sky-high, and months of work will be needed to repair damaged energy infrastructure.
"If the conflict does end and the Strait of Hormuz is reopened, this should support the flow of commodities and lower prices," Bullock said. "But this could take some time, and an orderly resolution is still not assured, meaning there are still upside risks to inflation and downside risks to growth."
Treasurer Jim Chalmers was similarly realistic: "We're very pleased with developments, but realistic about how long it will take for the world economy to normalise."
Still, there is rising optimism that the worst-case scenarios – such as the strait remaining shut into 2027 – can at least be ruled out. And at this moment, any optimism is welcome.
