 "Australia pauses rate hikes to assess tightening impact, inflation in focus")
By Stella Qiu
Australia's central bank on Tuesday left its cash rate unchanged at 3.6% to break a run of 10 straight hikes, saying it wanted additional time to assess the impact of past increases as the economy slows and inflation has peaked.
Wrapping up its April policy meeting, the Reserve Bank of Australia (RBA) did warn that "some further tightening of monetary policy may well be needed" to ensure that inflation returns to target.
Markets had been wagering on a pause, while analysts were split on whether the bank would hike again given the still high level of inflation.
Investors reacted by pushing the Australian dollar 0.4% lower to $0.6758. Three-year bond futures were up 9 ticks to 97.14, with futures now also leaning towards a pause in May, implying hikes are essentially over.
"The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty," said governor Philip Lowe.
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"The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt."
Gareth Aird, economist at Commonwealth Bank of Australia, said the change in forward guidance, compared with the previous stance that "further tightening of monetary policy will be needed", indicated that the board is less convinced that they would hike rates again.
"To be clear, the Board has still retained a hiking bias, as we anticipated. But it is a more watered down version of the previous statement," said Aird, maintaining his view that rates would have to peak at 3.85%.
One risk to further tightening is the first-quarter inflation data due in late April, which could still surprise on the upside as rents and utility prices are rising quickly.
Bill Evans, chief economist at Westpac, said there isn't sufficient evidence for the bank to change its terminal rate forecast of 3.85%, after Tuesday's pause.
CONSUMERS A CONCERN
The RBA has raised rates by a total of 350 basis points to tame runaway inflation, which has peaked at 7.8% in the final quarter last year and slowed to 6.8% in February, but still remains way above the central bank's target of 2-3%.
The labour market is tight with the jobless rate hovering at near 50-year lows and job vacancies sharply above pre-COVID levels, while business surveys are also pointing to resilient conditions.
Lowe acknowledged that inflation has peaked in the country, and noted "a substantial slowing" in household spending, in the face of cost-of-living pressures, high interest rates and a decline in housing prices.
While house prices are showing early signs of bottoming out, the construction sector is in a hole, with high costs prompting the collapse of a few home builders, highlighting pockets of stress across the economy.
Also reducing the pressure for the RBA to hike again, markets are pricing in more aggressive rate cuts from the Federal Reserve by the year end after the recent troubles at US regional banks and the Credit Suisse takeover fuelled concerns about tighter lending conditions.
Lowe said Australia's banking system is strong and well placed to provide credit to the economy, but the banking problems are expected to lead to tighter financial conditions, an additional headwind for the global economy.
Paul Bloxham, HSBC's chief economist for Australia, New Zealand and Global Commodities, said the RBA appeared to be more downbeat on the economy especially in its reference to consumers.
"If monetary policy is already having a strong effect on consumers and they still got to see the full effect of the tightening they have delivered on the economy, that tells us the RBA is likely to be quite cautious and sit still." "So it's the beginning of a long pause in our view," said Bloxham, who expects the RBA to hold steady until the end of 2024.