RBA signals potential pause in rate hikes with softer tone

The Reserve Bank of Australia (RBA) lifted the official cash rate by 25 bps to 3.6 per cent on Tuesday, marking the 10th consecutive hike since May 2022. 

The increase was anticipated by market observers following a month of hawkish rhetoric by RBA governor Philip Lowe who maintained inflation remained “way too high”. 

But the central bank has softened its tone, with its post-meeting statement containing a notable amendment to its forward guidance. 

Following its February meeting, the board said it expected “further increases in interest rates will be needed over the months ahead”. 

However, its latest statement omits the reference to “increases” or adjustments “over the months ahead”. 

“The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” the revised statement reads.

According to the Commonwealth Bank, this revision suggests a “pause is possible” in April. 

“This change does not preclude the RBA from raising the cash rate more than once from here,” CBA noted. 

“But it means that the board is not convinced that it needs to hike the cash rate multiple times from here.  

“Indeed, the governor has kept the door ajar for a pause at the April board meeting.”

Elsewhere in the RBA’s statement, the central bank stated “in assessing when and how much further interest rates need to increase”, the board would monitor developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. 

The inclusion of “when”, CBA added, could suggest the RBA has “not yet made their mind up around increasing the cash rate in April”.

CBA continued: “Markets should treat the April board meeting as ‘live’ and the RBA could pause.”

AMP Capital chief economist Shane Oliver also noted the RBA’s “less hawkish” language, adding there is a “strong case for a pause” amid slowing demand, improving supply side conditions, the “increasing pain being born by mostly younger households with mortgages”, subdued wages growth and “contained” longer term inflation expectations. 

“We are concerned that ongoing rate hikes risk unnecessarily plunging the economy into a recession. As such, it’s time for the RBA to have a pause and we are assuming a pause at their April meeting,” he said. 

“While the risks are still on the upside for rates, our view remains that we are at or near the top and that by late this year or early next, the RBA will start cutting rates.”