RBA pauses rate hike for July but warns it may increase in the future.
At its Board Meeting today, the Reserve Bank of Australia kept its official cash rate on hold at 4.10%.
The RBA's decision to keep rates on hold today was largely expected by the rates market (80% priced). In contrast, about two-thirds of the forecasting community predicted a rate hike.
The RBA's reasons for staying on hold echoed in part why it paused its rate hiking cycle in April - to assess the impact of a cumulative 400bp or rate hikes over the past fourteen months.
"Interest rates have been increased by 4 percentage points since May last year", and today's pause "will provide some time to assess the impact of the increase in interest rates to date and the economic outlook."
The RBA elected to look through strength in June across employment, retail sales, building approval and a fourth consecutive monthly rise in housing prices to focus on a welcome fall in inflation.
"Inflation in Australia has passed its peak, and the monthly CPI indicator for May showed a further decline."
While at the same time sounding less concerned about the possibility of wage growth spiralling out of control.
"At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up."
While a pause will no doubt see mortgage holders sigh in relief, the RBA left the door open to future rate hikes.
"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 how the economy and inflation evolve."
The RBA noted that the most critical factors behind the next move in rates would be "developments in the global economy, trends in household spending and the outlook for inflation and the labour market".
The rates market is almost fully priced (78%) for a 25bp rate hike by September which would take the cash rate to 4.35%.
The following incoming data will be closely scrutinised for clues around when and how much further the RBA might tighten.
- RBA Governor Lowe's speech tomorrow (Wednesday, July 12 at 1.10 pm)
- RBA Meeting Minutes (Tuesday, July 18 at 11.30 am)
- Labour Force report for June (Thursday, July 20 at 11.30 am)
- Q2 inflation data (Wednesday, July 28 at 11.30 am)
- Retail Sales (Thursday, July 28 at 11.30 am)
What happened to the ASX 200?
The ASX 200 was trading down 10 points at 7235 before the RBA announcement.
The RBA's on-hold decision prompted a 50-point bounce to a high of 7285.80 – a move that should extend in the coming days above 7300, potentially towards the top of its recent range at 7360/90.
The Financial (+0.94%), Energy (+0.90%) and Real Estate (0.76%) sectors have led the gains. In contrast, the Health Care (-0.12%) and Industrial (-0.14%) sectors are trading lower.
ASX 200 daily chart